Glossary

algorithm A strategy for solving a problem that guarantees solution in a finite number of steps if the problem has at least one solution. An example of a very simple algorithm is that for obtaining temperature on the Fahrenheit scale when the value for the centigrade scale is known: Multiply the known value by 1.8 and add 32.

bounded rationality Principles underlying nonoptimizing adaptive behavior of real information processing systems working under conditions of limited time, information, and computational capacities. Among those principles specified by Herbert Simon is satisficing.

cognitive illusions or biases Systematic deviations of human judgments from rules of probability theory and logic. The occurrence of cognitive illusions is attributed to some judgment heuristics that are often useful but sometimes lead to predictable errors.

heuristic An approximate strategy or "rule of thumb'' for problem solving and decision making that does not guarantee a correct solution but that typically yields a reasonable solution quickly or brings one closer to hand.

noncompensatory heuristic A heuristic is noncompensatory if, once it has used a piece of information to make a decision, no further information in any combination can undo or compensate for the effect of the original information. In contrast, a heuristic is compensatory if there is at least one piece of information that can be outweighed by other pieces of information. A compensatory strategy integrates at least some of the available information and makes trade-offs between the relevant pieces of information to form an overall evaluation of each of the available alternatives or options.

satisficing According to Herbert Simon, satisficing is using experience to construct an expectation (or aspiration level) of a reasonable solution to some problem and stopping the search for solutions as soon as one is found that meets the expectation.

unbounded rationality Decision-making strategies that have no regard for constraints of time, knowledge, or computational capacities. Modern mainstream economic theory is largely based on unbounded rationality models that portray economic agents as fully rational Bayesian maximizers of subjective utility.

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