ABSTRACT
This chapter explores some approaches to softening economists’ assumptions about rationality, focusing in particular on Herbert Simon’s insights about bounded rationality under conditions when rationality may not be about mathematical maximization and statistical reasoning, but will nonetheless involve systematic reasoning processes. It focuses on a range of biases and heuristics that affect decision-making under uncertainty. The chapter shows that human decision-making is limited by the power of human cognition. P. M. Todd and G. Gigerenzer explain that the mind has an “adaptive toolbox” for decision-making involving heuristics, which are simple rules enabling smart choices to be made using minimal information and exploiting the structure of information given the environment context. Different classes of heuristics are characterized by “simple building blocks” capturing how the search for information is conducted. Generally, heuristics can be justified as procedurally rational and biases involve misjudgements of information and/or events.
