Bounded Rationality Essay

xii). Richard Thaler (1991) explains that Kahneman and Tversky have shown that “mental illusions should be considered the rule rather than the exception. Systematic, predictable differences between normative models of behavior and actual behavior occur because of what Herbert Simson [sic!] (1957, p. 198) called ‘bounded rationality’.” (p. 4) My first point is to disentangle the confusion between bounded rationality (or procedural rationality) and irrationality inherent in these statements—a confusion which has been repeated many times (e.g., Oaksford & Chater, 1992; see Lopes, 1992). I use the term “irrationality” as a shorthand for the various “errors” and “fallacies” in statistical and probabilistic judgment which Camerer lists, such as the conjunction fallacy, the base rate fallacy, and the overconfidence bias. In each of these alleged demonstrations of irrationality, the assumption is made that it is crystal1

I am grateful for comments on earlier versions of this paper by Bernhard Borges, Ralph Hertwig, Ulrich Hoffrage, Timothy Ketelaar, and Laura Martignon.

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Bounded Rationality: Models of Fast and Frugal Inference

clear what the correct judgment is. Sound reasoning is reduced to applying a simple rule such as the conjunction rule or Bayes’ rule, without even looking at the content and context of the task (Gigerenzer, 1996a; Gigerenzer & Murray, 1987). Systematic deviations of human judgment from these