Question

Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.

Answer 1

See the explanation below.

Step-by-step explanation:

Rationality assumption states that people will be able to make logical and consistent choices that will enable them to maximize their utility when they have a prior knowledge of likely outcomes of their decision.

On the other hand, bounded rationality assumption states that the information available to people, limited time availability, and their limited cognitive process limits their rationality when they are making a decision.

Therefore, bounded rationality assumption came to challenge the rationality assumption because it holds that people are limited by the time and information available to them as well as their thinking capacity.

Answer 2

Rationality assumptions state that people do not knowingly take the decisions that may incur a loss to them. These are the decisions taken on the self-interest and self-motivation of the decision-maker.

Bounded rationality basically tones down a lot of the assumptions that go into homo economicus. Satisficers are a more diverse bunch, with unique tastes and preferences that change over time. Satisficers are not particularly good at making consistent decisions or predicting the consequences of their choices. They often decide things, not out of calculated self-interest, but for other reasons, social norms, ethics, fairness, love, peer pressure, and so on. Sometimes they even decide things on a whim, with little or no thought of the consequences.

Explanation: The assumption of bounded rationality suggests that people might use rules of thumb to guide their decision making because people can not examine every possible choice available to the. While the; rational choice theory states that individuals rely on rational calculations to make rational choices that result in outcomes aligned with their own best interests.