Abstract: In a world of known risks, rational theories provide the norms for successful behavior. In a world where not all risks are known and where optimization is not feasible, ‘nonrational’ tools such as heuristics are needed. In comparison to optimization models, heuristics are robust and can lead to more accurate predictions, while saving time and effort. The study of heuristics addresses the descriptive question of what heuristics an individual or institution has in their ‘adaptive toolbox,’ as well as the normative question of their ecological rationality, i.e., which heuristics in which situations are most accurate and effective.
Keywords: adaptive toolbox, bias-variance dilemma, bounded rationality, decision making, heuristics, nonrational theories, optimization, risk, uncertainty