Disclaimer: Economics (even behavioral economics apparently) drives me bonkers.
I understand this notion of Bounded Rationality in the context of being able to answer test questions correctly (I think anyway) but the fundamental logic isn’t adding up to me. I’m just curious as to what I am missing and/or what others thoughts are regarding this.
Here is my understanding of a few things:
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Utility is the amount of satisfaction received from consuming a good or service. Utility is unique to each individual based on their own preferences, etc…
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An optimal decision in an economic context is the decision that maximizes an individual’s utility given their budget.
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Bounded Rationality is the idea that individuals will make decisions that aren’t optimal but are satisfice (satisfactory and sufficient combo? really?) This “phenomenon” occurs through the usage of heuristics, hence, people are using ‘mental shortcuts’ based on past experiences and are not being fully rational with their decision.
Am I wrong that ECON pretty much assumes and that individual can’t consistently make optimal decisions due to lack of computational/informational resources? So what is this telling us? It just seems to me like a long and fancy way to explain that an oversimplified assumption (people are knowledgeable of every factor that goes into making a decision) isn’t feasible because people can’t possibly know every factor. I must be misinterpreting this.
Furthermore, if we buy into this idea of bounded rationality, how do you determine if someone is exhibiting bounded ratiionality if the basis of comparison is a common precept of rational behavior? Would the common precept not be determined by some sort of peer group comprised of individuals that are pursuing their own optimal decision based on their own UNIQUE utility regarding the decision in question?
In other words as an example:
Suppose Lucy decides to only go to 1 car dealership to buy a car even though she knows she can most likely get a better car for her budget if she goes to multilple dealers. Most people go to multiple car dealerships but Lucy’s reasoning for only going to one dealer is that she gets severe anxiety when talking with car dealers. Is she exhibiting bounded rationality? I view her decision regarding the car purchase as closer to the optimal decision than the alternative of going to multiple dealers. Can we not say with certainty that Lucy inherently gained more utility from the alleviation of anxiety associated with going to multiple car dealerships than the amount of utility she lost in car quality? How could that be refuted?! Is Lucy’s utility not defined by the decisions she makes?! What even is f*&^ing utility?!
I just re-read my post and I have no idea what I’m saying at this point.