Economics, 3rd Edition

Bounded rationality

 is the idea that humans make decisions under the constraints of limited, and some-

times unreliable, information, that they face limits to the amount of information they can process and that 

they face time constraints in making decisions.

bounded rationality 

the idea that humans make decisions under the constraints of limited, and sometimes unreliable, 

information

The SEM has an implied assumption that to make a rational decision which maximizes utility, con-

sumers can know everything about the consumption decision that they make and can process all this 

information very quickly. Research has suggested that this is far from the case. Humans make systematic 

and consistent mistakes in decision making. We will now outline some of the main errors in judgement 

and decision making.