Bounded arbitrage and nearly rational behavior

Leandro Nascimento ()
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Leandro Nascimento: Universidade de Brasília

Economic Theory, 2024, vol. 77, issue 4, No 3, 974 pages

Abstract: Abstract We establish the equivalence between a principle of almost absence of arbitrage opportunities and nearly rational decision-making. The implications of such principle are considered in the context of the aggregation of probabilistic opinions and of stochastic choice functions. In the former a bounded arbitrage principle and its equivalent form as an approximately Pareto condition are shown to bound the difference between the collective probabilistic assessment of a set of states and a linear aggregation rule on the individual assessments. In the latter we show that our general principle of limited arbitrage opportunities translates into a weakening of the McFadden–Richter axiom of stochastic rationality, and gives an upper bound for the minimum distance of a stochastic choice function to another in the class of random utility maximization models.

Keywords: Arbitrage; Aggregation of probability measures; Stochastic choice (search for similar items in EconPapers)
JEL-codes: D70 D81 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00199-023-01515-y

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