Question

Bounded rationality is understood is the sense of cognitive limitations, as opposed to exotic tastes or erroneous beliefs. Briefly describe a real-world economic situation pervaded by problems of bounded rationality. Explain what behavior you observe that suggests agents are not fully informed or rational, and why you believe bounded rationality is a likely explanation.

Answer 1

Bounded rationality: When a person takes decision with an aim of satisfying his/her needs without going into all possible options and choosing the optimal one since his/her bounded rationality is affected by time constraints, decision problem, hid/her cognitive ability, etc.

A real world example is like a home buyer who wants to buy a home but he/she does have time constraint in terms of all available homes will be sold out say in a month and decision problem, i.e. his/her immediate home/house requirement in a given location and the available interest rates offered by banks for the home loan. A satisfiers does not have full information about the real estate market and whether he/she is paying the higher price for the chosen home and whether interest rates are higher in the market and whether they will come down in the coming months or not and also due to time constraint, he/she tries to take a decision subject to all above bounded constraints and try to satisfy his/her needs and not able to take a rational decision by exploring all possible alternatives available with him/her.

As per above it is concluded that the person concerned does not have all information available in order to take rational decision and acts accordingly as per bounded rationality.