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bounded rationality

Does superior information make us more discerning? What Uber drivers can teach us about learning and rationality

Roxanne Bauer's picture

In 1957, Herbert A. Simon (Nobel Prize in economics 1978) introduced the concept of bounded rationality that recognizes that in decision making, human rationality is limited by the information we have, our own cognitive biases, our training and experience, and the finite amount of time we have to make a decision. Individuals and firms do the best they can with the information they have, and since they don’t have time to evaluate and rationally pick the optimal solution, they simplify their choices and go with one that is satisfactory rather than rationally optimal—this is called stastificing.

Behavioral economics accounts for this by attempting to incorporate psychological insights. While most economists agree that there are some limits to the reasoning capabilities of individuals and firms, there has been much discussion about where and how to account for bounded rationality.  On the spectrum between perfect rationality and the total absence of it, where are humans?

To explore this question, let’s take a look at cabdrivers and Uber drivers.