Economics and psychology.Perfect rationality versus bounded rationality

Daniele Schiliro'

MPRA Paper from University Library of Munich, Germany

Abstract: Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

Keywords: Bounded rationality; procedural rationality; rational choice; cognitive economics (search for similar items in EconPapers)
JEL-codes: B52 C00 D81 D83 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-hme, nep-hpe, nep-neu and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34292

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