Bounded Rationality Essay

7410 Words Dec 9th, 2010 30 Pages
Published in: Swiss Journal of Economics and Statistics, 133 (2/2), 1997, 201–218. © 1997 Peter Lang, 0303-9692.

Bounded Rationality: Models of Fast and Frugal Inference
Gerd Gigerenzer1 Max Planck Institute for Psychological Research, Munich, Germany

Humans and other animals need to make inferences about their environment under constraints of limited time, knowledge, and computational capacities. However, most theories of inductive inferences model the human mind as a supercomputer like a Laplacean demon, equipped with unlimited time, knowledge, and computational capacities. In this article I review models of fast and frugal inference, that is, satisficing strategies whose task is to infer unknown states of the world (without
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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

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