Bounded Rationality

Two leaders in the field explore the foundations of bounded rationality and its effects on choices by individuals, firms, and the government.

Bounded rationality recognizes that human behavior departs from the perfect rationality assumed by neoclassical economics. In this book, Sanjit Dhami and Cass R. Sunstein explore the foundations of bounded rationality and consider the implications of this approach for public policy and law, in particular for questions about choice, welfare, and freedom. The authors, both recognized as experts in the field, cover a wide range of empirical findings and assess theoretical work that attempts to explain those findings. Their presentation is comprehensive, coherent, and lucid, with even the most technical material explained accessibly. They not only offer observations and commentary on the existing literature but also explore new insights, ideas, and connections.
 
After examining the traditional neoclassical framework, which they refer to as the Bayesian rationality approach (BRA), and its empirical issues, Dhami and Sunstein offer a detailed account of bounded rationality and how it can be incorporated into the social and behavioral sciences. They also discuss a set of models of heuristics-based choice and the philosophical foundations of behavioral economics. Finally, they examine libertarian paternalism and its strategies of “nudges.” 
 Acknowledgments xi
1 Introduction 1
2 What Is Rationality and What Is the Evidence for It? 23
3 The Case for Bounded Rationality 109
4 Behavioral Models of Heuristics-Based Choice 169
5 Kahneman and Tversky's Research Program on Heuristics and Biases 265
6 The Fast and Frugal Heuristics Research Program 305
7 Philosophical Foundations 341
8 Optimal Taxation and Regulation in Behavioral Economics 374
9 Libertarian Paternalism in Theory 403
10 Libertarian Paternalism in Practice 423
11 Epilogue 443
Notes 445
References 455
Index 503“Bounded Rationality is simply the best book on this topic. Encompassing, empirically grounded, analytically sophisticated, and intuitively compelling.”
—Ernst Fehr, Professor of Economics, University of Zurich  

“This is a wonderful introduction to both classic and more recent behavioral economics. The mixture of theory and empirical evidence is very useful and healthy. The applications to public policy are particularly interesting. I highly recommend it to all entrants to the field.”
—Xavier Gabaix, Pershing Square Professor of Economics and Finance, Harvard UniversitySanjit Dhami is Professor of Economics at the University of Leicester and the author of the seven-volume The Foundations of Behavioral Economic Analysis. Cass R. Sunstein is Robert Walmsley University Professor at Harvard Law School and Chair of the Technical Advisory Group on Behavioral Insights and Sciences at the World Health Organization. He is the author of Sludge (MIT Press), Nudge (with Richard H. Thaler), and other books.