Question

Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.

Short answer

The rationality assumption states that people take the decision very carefully so as not to incur a loss while the bounded rationality is based on a simple method available to them.

Step-by-step solution

Step 1. Bounded Rational Behavior.

Bounded rationality behavior explains that people are rational but not completely as they do not examine every possible choice given to them but instead sort among the alternatives.

Step 2. Assumptions.

Rationality assumptions state that people make their decisions such that they do not incur a loss. On the other hand, bounded rationality do not consider every choice instead they make a choice by a simple method.