Most conventional theories in economics are based on the premise of rational decision making by individuals.
However, the idea of bounded rationality dictates how humans are bounded in their ability to be completely rational. It illustrates how people often make irrational decisions owing to their own cognitive limitations, the time constraints faced by them along with the information available at their disposal.
This is where heuristics step in. In psychology, heuristics refer to problem solving approaches based on intuition and past experience instead of careful analysis.
Though these approaches work well in most situations and facilitate timely decisions, they often pave way for cognitive biases.
Want to delve deeper into a host of cognitive biases which distort the coherence of our decisions?
Watch the video.