Editing Market failure (section)

===Bounded rationality===
{{main|Bounded rationality|Behavioral economics}}
In ''Models of Man'', [[Herbert A. Simon]] points out that most people are only partly [[Rationality|rational]], and are emotional/[[irrational]] in the remaining part of their actions. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) [[information]]" ([[Oliver E. Williamson|Williamson]], p.&nbsp;553, citing Simon). Simon describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include:
* limiting what sorts of [[utility]] functions there might be.
* recognizing the costs of gathering and processing information.
* the possibility of having a "[[vector (geometry)|vector]]" or "multi-valued" utility function.

Simon suggests that economic agents employ the use of [[heuristics]] to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other, concurrent economic activities also requiring decisions.

The concept of bounded rationality was significantly expanded through behavioral economics research, suggesting that people are systematically irrational in day to day decisions. [[Daniel Kahneman]] in ''[[Thinking, Fast and Slow]]'' explored how human beings operate as if they have two systems of thinking: a fast "system 1" mode of thought for snap, everyday decisions which applies rules of thumb but is frequently mistaken; and a slow "system 2" mode of thought that is careful and deliberative, but not as often used in making ordinary decisions to buy and sell or do business.