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Heuristics and Public Policy: Decision Making Under Bounded Rationality

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posted on 23.08.2018, 13:48 by Sanjit Dhami, Ali al-Nowaihi, Cass R. Sunstein
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.

History

Citation

Harvard John M. Olin Center for Law, Economics, and Business Heuristics and Public Policy, 2018, Discussion Paper No. 963

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

VoR (Version of Record)

Published in

Harvard John M. Olin Center for Law

Publisher

Harvard Law School

issn

1936-5349

eissn

1936-5357

Copyright date

2018

Available date

23/08/2018

Publisher version

https://ssrn.com/abstract=3198739

Book series

Harvard John M. Olin Center for Law, Economics, and Business Heuristics and Public Policy Discussion Paper;963

Language

en