Bounded Rationality

Bounded rationality is the theory that there is only so much information we can consider when making decisions. These decisions are rational given the limited choice and awareness of the situation, but often don't maximise total utility, because people don't want to spend ages considering every option.

It could be argued that this is rational behaviour, as some things aren't worth spending the time thinking about. For example, It may be more rational to eat the same cereal every day rather than spend 5 minutes considering what activites you are likely to do, and what nutrients would be most optimal for your day.

The increase in technology has made information more widely available than ever, giving a greater amount of information, but this means that its almost impossible to read all of the information and weigh everything up against eachother in a reasonable time. It could be argued that the availability of information leads to more use of rules of thumb.

Rules of Thumb

The theory of bounded rationality suggests that people make decisions on basic rules of thumb. This means that they use their previous experience to make a best-guess on the actual best option. For example, some people may use the rule of thumb that more expensive goods will be higher quality, when this isn't necessarily the case.

Consequences of Bounded Rationality

Given that agents with bounded rationality don't fully consider all the options and information, it means that we can use Choice Architecture to influence people's decisions. This includes nudges.