Bounded rationality and the emergence of simplicity amidst complexity



Publication Details

Lee, C. (2012). Bounded rationality and the emergence of simplicity amidst complexity. In S. Zambelli & D. A.R. George (Eds.), Nonlinearity, Complexity and Randomness in Economics: Towards Algorithmic Foundations for Economics (pp. 111-129). United Kingdom: John Wiley & Sons Ltd.


The notion of rationality and the way in which it assumed and applied in economics is a much debated topic within the discipline itself and beyond. The vast body of literature under the headings of 'behavioural economics' and 'economics and psychology' have attempted to make sense of the extent to which and the manner in which rationality in reality differs from rationality as it is assumed in economics. The term 'bounded rationality', which can be traced back to Herbert Simon's influential contributions in the 1950s, has been used by many when referring to departures from the conceptualization of rationality as consistency or rationality as maximization in mainstream economic theory. Today, the notion of bounded rationality has a permanent place in economics. Its impact has been profound in terms of our theoretical and empirical understanding of decision making and judgement, markets, organizations and institutions. Parallel to the current research in mapping the boundaries of bounded rationality (to paraphrase Kahneman's Nobel lecture title) is an increasingly influential line of research that attempts to transform economics, this time into a social science that embraces complexity theory. A core element within this research programme is its focus on the emergence of complex structures from micro-level interactions between relatively simple parts/elements/agents. An analysis of how bounded rationality and complexity is related should be of great interest to economists. Most economists are likely to agree on the bounded rational nature of the human species as well as the complex nature of the economy. Yet, these two aspects have often been considered and researched separately with a few exceptions even though both are inextricably linked. This is a key aspect of Herbert Simon's ideas. The purpose of this essay is to explore the relationship between the simple and the complex in economics by anchoring our analysis on bounded rationality. The point of view taken in this essay is that bounded rationality and the complexity of environment are both inextricably linked - that the emergence of complex social structures would not possible without interactions between bounded rational agents and vice-versa. Furthermore, the bounded rational nature of agents is in itself a consequence of a complex environment. What this implies in terms of a broader vision of economics is a topic worth exploring.

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