Emotional arousal as a source of bounded rationality

This paper proposes an alternative psychological explanation for bounded rationality. According to Herbert Simon, bounded rationality arises from human cognitive limitations. Following the suggestion of institutional economist John R. Commons, I argue that extremes in emotional arousal also contribute to bounded rationality. This idea is formalized and developed using the Yerkes-Dodson law from psychology. Examples from the popular press and the academic literatures of law, management and economics are presented to illustrate the impact of this type of bounded rationality on human behavior. (C) 1999 Elsevier Science B.V. All rights reserved.