Bounded Irrationality: A New Perspective on Economic Behavior

Robin Maximilian Stetzka

Review of Behavioral Economics, 2024, vol. 11, issue 1, 1-42

Abstract: The literature on human rationality traditionally employs three distinct categories: The fully rational homo economicus achieving optimum all the time; the boundedly rational agent, trying to optimize but who may fail; and the irrational agent, suffering from a loss of control. However, behavior cannot be assigned to any of these three categories, when an agent does not lose control on the one hand but also does not even try to optimize. This paper seeks to introduce a new category on the rationality spectrum, namely bounded irrationality. Boundedly irrational behavior is marked by agents focused on not losing control but with no intention of optimizing their decisions. In addition to developing the theory, the empirical relevance of bounded irrationality is demonstrated using evidence from the gambling literature. This contribution fills a gap in explaining and understanding human behavior.

Date: 2024
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