Foundations and Limitations
Edited by Josef Drexl, Wolfgang Kerber and Rupprecht Podszun
Chapter 11: Bounded Rationality and Competition Policy
Justus Haucap 1. INTRODUCTION More than 50 years ago Herbert Simon introduced the concept of bounded rationality into the economics literature. As the term already suggests, the concept does not imply completely irrational behavior, but rather a limited form of rationality. According to Simon (1957: 24) himself economic actors should be assumed to be ‘intendedly rational, but only limitedly so’. Simon’s original idea was to develop models which would describe how decisions are reached rather than what decision is finally made (also see Gigerenzer and Selten 2002: 4). These models would be based on heuristics or proximal mechanisms rather than optimization processes. According to Selten (1990: 653), Gilboa and Schmeidler (1995) and others, human behavior is not guided by a few abstract principles, but rather case-based in the sense that simple decision rules are employed which are chosen on the basis of a few simple criteria. As Gigerenzer and Selten (2002: 4) correctly point out, it is possible that in real world situations ‘simple and robust heuristics can match or even outperform a specific optimization strategy’. A similar point was previously also made and illustrated by Heiner (1983). Today, however, the term bounded rationality is not limited to this particular understanding. In fact, as Gigerenzer and Selten (2002: 4) remark, ‘bounded rationality has become a fashionable label for almost every model of human behavior’. While this ‘complaint’ may be exaggerated, it is certainly true that at least two understandings of boundedly rational behavior exist. While some scholars argue that bounded...
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