Final answer:
Bounded rationality suggests that individuals are limited by their cognitive abilities and available information when making decisions, rather than being perfectly rational as traditional economic models assume. Choices are made based on partial information, using mental shortcuts and past experiences rather than perfect predictions of the future.
Step-by-step explanation:
Bounded rationality is a concept within behavioral economics and decision-making which states that the cognitive limitations of individuals limit their ability to make fully rational decisions. This concept challenges the traditional economic presumption of full rationality in decision-making. In reality, individuals make decisions with only partial information and a limited capacity to process that information.
Regarding the original statement, bounded rationality suggests that:
- Rationality does not require complete knowledge and anticipation of the consequences that follow each choice, because individuals are limited by the information they have and their processing capacity.
- Rationality also does not require a choice among all possible alternative behaviors, because evaluating every possible alternative is often unrealistic due to information processing limitations.
- Imagination may indeed supplement a lack of experienced feeling in attaching value to choices, as people use heuristics and other mental shortcuts to make decisions in the absence of full information.
Traditional economic models assume that people take all available information and make consistent, informed decisions that are in their best interest. However, in reality, adaptive expectations and incremental decision-making are often more accurate representations of human behavior, where people use past experiences and gradually adapt over time rather than being perfect predictors of the future.