Inductive Reasoning and Bounded Rationality

The type of rationality assumed in economics - perfect, logical, deductive rationality - is extremely useful in generating solutions to theoretical problems. However, it demands much of human behavior, much more in fact than it can usually deliver. There are 2 reasons for perfect or deductive rationality to break down under complication. The obvious one is that beyond a certain level of complexity human logical capacity ceases to cope - human rationality is bounded. The other is that in interactive situations of complication, agents cannot rely upon the other agents they are dealing with to behave under perfect rationality, and so are forced to guess their behavior. This lands them in a world of subjective beliefs, and subjective beliefs about subjective beliefs. Objective, well-defined, shared assumptions then cease to apply. In turn, rational, deductive reasoning itself cannot apply. The problem becomes ill-defined.