Presented By: Social, Behavioral, and Experimental Economics (SBEE)
Social, Behavioral & Experimental Economics (SBEE): Are Consumers Boundedly Rational?
Wes Hutchinson, University of Pennsylvania
Abstract
Bounded rationality is a frequently used construct in both psychology and economics that is generally meant represent the idea that human decisions often deviate from optimal decisions when the decision problem is narrowly and precisely defined; however, these decisions are brought into closer alignment when the problem is expanded to include the known constraints of human cognition, such as the costs of mental effort and the feasibility of computing optimal solutions. In this paper, I propose a general framework for bounded rationality in which actual thinking and deciding is compared to optimal thinking and deciding. More specifically, actual learning and inference is compared to Bayesian updating, actual attention and memory is compared to the full use of available information and rational inattention, actual planning is compared to forward-looking cost/benefit analysis, and actual preference and choice are compared to utility maximization. The basis of these comparisons is a set of ten empirical results from my own research. My general conclusions are that, as humans, (1) we are very good at selecting important information, learning from past experience, and similarity-based reasoning, and (2) pretty good at verbal and non-verbal communication, simple symbolic inference and predicting the very near future, but (3) we are quite poor at complex problem solving and understanding the long-term consequences of our current actions.
Bounded rationality is a frequently used construct in both psychology and economics that is generally meant represent the idea that human decisions often deviate from optimal decisions when the decision problem is narrowly and precisely defined; however, these decisions are brought into closer alignment when the problem is expanded to include the known constraints of human cognition, such as the costs of mental effort and the feasibility of computing optimal solutions. In this paper, I propose a general framework for bounded rationality in which actual thinking and deciding is compared to optimal thinking and deciding. More specifically, actual learning and inference is compared to Bayesian updating, actual attention and memory is compared to the full use of available information and rational inattention, actual planning is compared to forward-looking cost/benefit analysis, and actual preference and choice are compared to utility maximization. The basis of these comparisons is a set of ten empirical results from my own research. My general conclusions are that, as humans, (1) we are very good at selecting important information, learning from past experience, and similarity-based reasoning, and (2) pretty good at verbal and non-verbal communication, simple symbolic inference and predicting the very near future, but (3) we are quite poor at complex problem solving and understanding the long-term consequences of our current actions.
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