- Submitted By: s1k3y
- Date Submitted: 04/06/2010 11:18 AM
- Category: Social Issues
- Words: 4761
- Page: 20
- Views: 428

Rationality in decision-making

Index:

Introduction.

Part 1: The relationship between bounded rationality and perfect rationality.

Part 2: Level of rationality.

Part 3: Example of an analysis using the objective function and the level of rationality.

Conclusions.

Bibliography.

Introduction

Rationality, perfect or limited, has always been one of the basic assumptions in most economic models of decision making. At the same time the choice between perfect rationality and bounded rationality was, and remains, the subject of much debate and clashes between economists of different ideological currents. The question is which of the two eligible for when developing a model of decision making. Models of classical economic theory using the assumption of perfect rationality and thereby tend to ignore the restrictions on who undergo the decisions of economic agents, such as the lack of information or insufficient computing capacity of people in complex situations. And they are obviously restrictions exist in real life, so that the classical model loses strength in the field of practice.

The first to propose an alternative model to classical, that is closer to reality, was Herbert A. Simon, who researched on this subject in the 50s. He defined the bounded rationality as the term that describes the decision process of an individual considering cognitive limitations of both knowledge and computational capacity. From then on have been published many articles and books, expanding and interpreting the concept of bounded rationality. In fact, we can include as models of bounded rationality to those who replaced one or more of the orthodox assumptions about rational behavior, for explanations of individual behavior that are intended to be more realistic.

I would not underestimate the models of perfect rationality, on the contrary, I want to show their importance when formulating models of bounded rationality that can be used in practical life, although it is...