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Heuristics and Public Policy: Decision-making Under Bounded Rationality

Author

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  • Sanjit Dhami
  • Ali al-Nowaihi
  • Cass R. Sunstein

Abstract

How do human beings make decisions when, as the evidence indicates, the assumptions of the Bayesian rationality approach in economics do not hold? Do human beings optimize, or can they? Several decades of research have shown that people possess a toolkit of heuristics to make decisions under certainty, risk, subjective uncertainty, and true uncertainty (or Knightian uncertainty). We outline recent advances in knowledge about the use of heuristics and departures from Bayesian rationality, with particular emphasis on growing formalization of those departures, which add necessary precision. We also explore the relationship between bounded rationality and libertarian paternalism, or nudges, and show that some recent objections, founded on psychological work on the usefulness of certain heuristics, are based on serious misunderstandings. JEL classifications: D01, D04, D81, D9

Suggested Citation

  • Sanjit Dhami & Ali al-Nowaihi & Cass R. Sunstein, 2019. "Heuristics and Public Policy: Decision-making Under Bounded Rationality," Studies in Microeconomics, , vol. 7(1), pages 7-58, June.
    • Handle: RePEc:sae:miceco:v:7:y:2019:i:1:p:7-58
    DOI: 10.1177/2321022219832148
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    References listed on IDEAS

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    2. Stuart Shapiro & Debra Borie-Holtz, 2020. "Small business response to regulation: incorporating a behavioral perspective," Palgrave Communications, Palgrave Macmillan, vol. 7(1), pages 1-9, December.

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    More about this item

    Keywords

    Heuristics; Biases; Bayesian rationality; ecological rationality; true uncertainty; libertarian paternalism;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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