What is \"bounded rationality\"? Arthur suggests that decision makers conceive a

Question

What is "bounded rationality"? Arthur suggests that decision makers conceive and nurture an "ecology of focal predictors" to deal with complexity of the unknown. Explain Arthur's ideas using the following scenario: Forecast the Dow Jones Average for the close of market trading on this day in one year from the current date. Would you put your entire life savings on your forecast? Allow a 5% margin of error to your forecast. Do you feel more confident in your forecast? Why? What if you do put your life savings on this and you are wrong?

Explanation / Answer

Answer:

Bounded rationality says that the human mind has limited power of analysis, limited to information that is available.

No, I will not put my savings on that forecast. But yes including margin of error in forecast increases the confidence in investment as it increases the information set which is available to us and makes us more informative and thus taking investment decision becomes easy for us.

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