Bounded Rationality in Asset Markets: A Framework for Understanding Price Dynamics Through the Lens of Human Decision-Making

This article examines the paradigm shift from classical economic theory's perfect rationality assumption to the more nuanced framework of bounded rationality in financial markets. Through analysis of multiple empirical studies across different market contexts, how cognitive limitations and information constraints influence decision-making processes and market outcomes. The article synthesizes evidence from experimental asset markets, real-world trading behavior, and evolutionary market dynamics to demonstrate how bounded rationality manifests in various market states. The findings reveal that market participants consistently employ heuristic-based strategies and technical analysis tools, leading to systematic deviations from fundamental values. The article documents the emergence of distinct market states — fundamental convergence, cyclical patterns, and chaotic fluctuations — as products of collective bounded rational behavior. These results suggest that market inefficiencies and price volatility are inherent features rather than anomalies, emerging from the interaction of agents operating under cognitive constraints. The article contributes to our understanding of market dynamics by providing a more realistic framework that accounts for human cognitive limitations in financial decision-making.