Rationality, for economists, simply means that when you make a choice, you will choose the thing you like best. This is very different from the way we normally think about rationality. Usually when we talk about rationality we use it to mean sensible, or reasonable. To economists—as long as you’re doing what you want given your situation, you’re acting rationally.
Rational choice theory tries to understand the economy by thinking about the actions of one individual and adding up what would happen if everyone acted like them. To do this, rational choice theorists need to settle on what the average, or representative, person looks like, and how he or she acts. One of the oldest, and most popular versions of a representative person, and the one typically used in rational choice theory, is called ‘economic man’, or homo economicus.
Bounded rationality is the idea that we make decisions that are rational, but within the limits of the information available to us and our mental capabilities. Economists who think of us as ‘boundedly rational’ don’t see us as an ‘economic superman’, or homo economicus that spends his life optimizing the happiness created by every decision. Instead, they see us as satisficers— as people who choose the option that will satisfy their needs and wants without putting too much effort into making sure they’ve considering every single possibility.
Heuristics are mental shortcuts we use to make decisions faster. Heuristics are mental rules of thumb that allow us to jump past all the hard thinking that might otherwise go into a decision. When heuristics make us ignore other information and do unreasonable things, it’s called cognitive bias.
