'Rational choice theory' and 'Bounded rationality theory' - Deepstash

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What is 'rationality'? - Economy

'Rational choice theory' and 'Bounded rationality theory'

  • Rational choice theory thinks of people as economic super-men and women, also known as homo economicus. Economists use this theory to think about what 'economic man' would do, then add up the actions of billions of people to make models about how the economy works.
  • Bounded rationality theory looks at the ways we don't or can't act like homo economicus. It sees people as rational but limited by the information they possess and their ability to process that information.

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Heuristics: Mental Shortcuts
Heuristics: Mental Shortcuts

In our daily lives, we do not have the time, knowledge or skills to make the perfect decision/choice every time, and it may be too exhausting and time-consuming to make really big decisions in a pe...

Cognitive Bias: The Other End Of Heuristics

When our heuristics make us do unreasonable things and ignore obvious dangers, it is termed as a cognitive bias, a systematic error that is based out of our unawareness.

These systematic thinking patterns form the mental models that make us perform automated functions, and blind our views towards reality.

The Most Common Cognitive Biases
  • Representativeness Heuristic: assumes that if something reminds us of something we know already, it is part of the same group.
  • Availability Heuristic: The more something comes in front of us, the more likely we think it is.
  • Anchoring Heuristic: Unconsciously giving a disproportionate amount of importance to the first piece of information that is learned.