<p>One recent paper that is being positioned as a very wide-ranging theory of bounded rationality (although certainly it doesn't come close to capturing every insight in the field) is <a href="http://pages.stern.nyu.edu/~xgabaix/papers/sparsebr.pdf" rel="nofollow">Gabaix's forthcoming QJE, A Sparsity-Based Model of Bounded Rationality</a>.</p>

<p>Gabaix formulates a fairly general model where agents can rationally decide to pay limited attention to each economic variable (depending on its importance), and derives the consequences for the classic features of consumer theory, general equilibrium, and so on. Since this is not my field, I am not completely sure how this paper differs from the preexisting literature on rational inattention, but it does seem quite general and ambitious.</p>

CC BY-SA 3.0
2015-01-28T14:07:08.947Z
nice paper, very interesting.
Thorst
CC BY-SA 3.0
2014-12-14T19:49:16.203Z
2014-12-14T19:49:16.203Z
nominally rigid
<p><a href="https://en.wikipedia.org/wiki/Herbert_A._Simon" rel="nofollow noreferrer">Herbert A. Simon</a> coined the terms bounded rationality and satisficing. The connection between these concepts is that, since our cognitive aparatus has real-world bounds in terms of what can achieve (e.g. cognitive processing, memory, time, etc) people are often do not able to optimize. Hence they often satisfy with a sufficient good outcome (i.e. "satisfice").</p>

<p>The theory of expected utility still holds but people, instead of trying to maximize it, try to achieve at least a sufficient good level (threshold, aspiration level) in terms of expected utility.
Hence, the first course of action that people find which is able to satisfy (be greater than) that utility level is then chosen to be applied.</p>

<p><a href="https://en.wikipedia.org/wiki/Goal_programming" rel="nofollow noreferrer">Goal-programming</a> is one of the existing decision-theory methods which is based on Simon's underlying principle.</p>

CC BY-SA 3.0
2017-01-01T11:54:13.757Z
This answer could be greatly improved by linking to the approach, the literature and by clarifying who Simon is.
Giskard
CC BY-SA 3.0
2017-01-16T03:42:16.417Z
I've just included your suggestions of improvement, which I appreciate
decision maker
CC BY-SA 3.0
2017-01-16T06:42:53.643Z
Thank you but your strongest claim "A general approach to modelling bounded rationality is well-developed and has been proposed in the literature" is still without any source. As it stands, this answer just clarifies the basic concepts of BR.
Giskard
CC BY-SA 3.0
2017-01-19T19:16:36.647Z
Just changed that
decision maker
CC BY-SA 3.0
2017-01-19T19:35:40.573Z
Not at all. You merely linked to linked to a bio of Simon and the definition of goal-programming. How is either of these a literature of a general approach? Perhaps you misunderstand the question?
Giskard
CC BY-SA 3.0
2016-12-31T07:41:41.660Z
2017-01-16T21:35:21.970Z
2017-01-16T21:35:21.970Z
decision maker
<p>The term bounded rationality was introduced by <a href="http://en.wikipedia.org/wiki/Herbert_A._Simon" rel="nofollow">Herbert Simon</a>. He wrote</p>

<blockquote>
  <p>"The term, bounded rationality, is used to designate rational choice
  that takes into account the cognitive limitations of both knowledge
  and cognitive capacity. Bounded rationality is a central theme in
  behavioral economics. It is concerned with the ways in which the
  actual decision-making process influences decisions."</p>
</blockquote>

<p>This passage seems to focus only on incomplete information, limited information processing time, limited knowledge -and not on any "psychological biases" like framing effects and the like. But the passage is complemented by a last phrase</p>

<blockquote>
  <p>"Theories of bounded rationality relax one or more assumptions of
  standard expected utility theory"</p>
</blockquote>

<p>which suddenly opens the content of the term to anything. So "bounded rationality" has come to signify "deviations from strict rationality in <em>any way</em>", making it rather impossible to arrive at a general, all-encompassing, or even most-encompassing, modeling approach, that at the same time, will be specific enough so as to be operational.</p>

CC BY-SA 3.0
2014-11-20T05:15:13.160Z
2014-11-20T05:15:13.160Z
Alecos Papadopoulos
<p>It seems that bounded rationality models focus on explaining a particular psychological bias, in a very specific way. In particular, its seems that the state of the art consensus is that one size does not fit all. The prevalence of framing effects makes this issue very difficult, but is there any way to think of a general approach to modelling bounded rationality.
Is it regret minimization, or random choice, or rational inattention?</p>

CC BY-SA 3.0
2014-11-19T23:00:22.287Z
Not a full answer or one using recent advances, but I'd summarize bounded rationality as the "optimization over optimizations." When it is costly to optimize, folks develop rules of thumb. This brings up a funny infinite regress though. Addressing that, there's a Lipman (1991) piece, "How to Decide How to Decide How to...: Modeling Limited Rationality."
Pburg
CC BY-SA 3.0
2014-11-19T23:04:41.653Z
Nice, comment I did not know Lipman quote.
user157623
CC BY-SA 3.0
2014-11-20T03:32:00.507Z
This paper is very enlightening, Is Everything Connected, biases in Bounded Rationality http://www.columbia.edu/~po2205/papers/DeanOrtoleva_Relationship.pdf
user157623
<microeconomics><behavioral-economics><theory><decision-theory><bounded-rationality>
What are the recent advancements in building a unified theory of bounded rationality?
user157623
# What are the recent advancements in building a unified theory of bounded rationality?

(Asked by: username_0 on 2014-11-19)

It seems that bounded rationality models focus on explaining a particular psychological bias, in a very specific way. In particular, its seems that the state of the art consensus is that one size does not fit all. The prevalence of framing effects makes this issue very difficult, but is there any way to think of a general approach to modelling bounded rationality.
Is it regret minimization, or random choice, or rational inattention?

**Tags:** microeconomics, behavioral-economics, theory, decision-theory, bounded-rationality
> **Comments:**
> **username_1**: Not a full answer or one using recent advances, but I'd summarize bounded rationality as the "optimization over optimizations." When it is costly to optimize, folks develop rules of thumb. This brings up a funny infinite regress though. Addressing that, there's a Lipman (1991) piece, "How to Decide How to Decide How to...: Modeling Limited Rationality."  
> **username_0**: Nice, comment I did not know Lipman quote.  
> **username_0**: This paper is very enlightening, Is Everything Connected, biases in Bounded Rationality http://www.columbia.edu/~po2205/papers/DeanOrtoleva_Relationship.pdf  

---

## 3 answers

### Answer by username_6 on 2014-11-20. Score: 5 | Accepted answer

The term bounded rationality was introduced by [Herbert Simon](http://en.wikipedia.org/wiki/Herbert_A._Simon). He wrote

> "The term, bounded rationality, is used to designate rational choice
> that takes into account the cognitive limitations of both knowledge
> and cognitive capacity. Bounded rationality is a central theme in
> behavioral economics. It is concerned with the ways in which the
> actual decision-making process influences decisions."

This passage seems to focus only on incomplete information, limited information processing time, limited knowledge -and not on any "psychological biases" like framing effects and the like. But the passage is complemented by a last phrase

> "Theories of bounded rationality relax one or more assumptions of
> standard expected utility theory"

which suddenly opens the content of the term to anything. So "bounded rationality" has come to signify "deviations from strict rationality in *any way*", making it rather impossible to arrive at a general, all-encompassing, or even most-encompassing, modeling approach, that at the same time, will be specific enough so as to be operational.


---

### Answer by username_2 on 2014-12-14. Score: 4

One recent paper that is being positioned as a very wide-ranging theory of bounded rationality (although certainly it doesn't come close to capturing every insight in the field) is [Gabaix's forthcoming QJE, A Sparsity-Based Model of Bounded Rationality](http://pages.stern.nyu.edu/~xgabaix/papers/sparsebr.pdf).

Gabaix formulates a fairly general model where agents can rationally decide to pay limited attention to each economic variable (depending on its importance), and derives the consequences for the classic features of consumer theory, general equilibrium, and so on. Since this is not my field, I am not completely sure how this paper differs from the preexisting literature on rational inattention, but it does seem quite general and ambitious.

> **Comments:**
> **username_3**: nice paper, very interesting.  

---

### Answer by username_4 on 2016-12-31. Score: 0

[Herbert A. Simon](https://en.wikipedia.org/wiki/Herbert_A._Simon) coined the terms bounded rationality and satisficing. The connection between these concepts is that, since our cognitive aparatus has real-world bounds in terms of what can achieve (e.g. cognitive processing, memory, time, etc) people are often do not able to optimize. Hence they often satisfy with a sufficient good outcome (i.e. "satisfice").

The theory of expected utility still holds but people, instead of trying to maximize it, try to achieve at least a sufficient good level (threshold, aspiration level) in terms of expected utility.
Hence, the first course of action that people find which is able to satisfy (be greater than) that utility level is then chosen to be applied.

[Goal-programming](https://en.wikipedia.org/wiki/Goal_programming) is one of the existing decision-theory methods which is based on Simon's underlying principle.

> **Comments:**
> **username_5**: This answer could be greatly improved by linking to the approach, the literature and by clarifying who Simon is.  
> **username_4**: I've just included your suggestions of improvement, which I appreciate  
> **username_5**: Thank you but your strongest claim "A general approach to modelling bounded rationality is well-developed and has been proposed in the literature" is still without any source. As it stands, this answer just clarifies the basic concepts of BR.  
> **username_4**: Just changed that  
> **username_5**: Not at all. You merely linked to linked to a bio of Simon and the definition of goal-programming. How is either of these a literature of a general approach? Perhaps you misunderstand the question?  

---

