BoundedRationality_TheAdaptiveToolbox.pdf

2
What Is Bounded Rationality?
Reinhard Selten
Juridicum, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany
ABSTRACT
This chapter discusses the concept of bounded rationality as it is understood in the
tradition of H.A. Simon. Fundamental problems and theoretical issues are presented,
with special emphasis on aspiration adaptation theory. Further remarks concern basic
modes of decision behavior (like learning and expectation formation), reasoning, and the
connection between bounded rationality and motivation.
INTRODUCTION
Modern mainstream economic theory is largely based on an unrealistic picture
of human decision making. Economic agents are portrayed as fully rational
Bayesian maximizers of subjective utility. This view of economics is not based
on empirical evidence, but rather on the simultaneous axiomization of utility
and subjective probability. In the fundamental book of Savage (1954), the
axioms are consistency requirements on actions, where actions are defined as
mappings from states of the world to consequences. One can only admire the
imposing structure built by Savage. It has a strong intellectual appeal as a
concept of ideal rationality. However, it is wrong to assume that human beings
conform to this ideal.
Origins
At about the same time that Savage published his book, H.A. Simon created the
beginnings of a theory of bounded rationality (Simon 1957). He described decision
making as a search process guided by aspiration levels. An aspiration level
is a value of a goal variable that must be reached or surpassed by a satisfactory