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Bounded Rationality

Penelope Hernandez () and Coralio Ballester

No 111, Discussion Papers in Economic Behaviour from University of Valencia, ERI-CES

Abstract: The observation of the actual behavior by economic decision makers in the lab and in the field justifies that bounded rationality has been a generally accepted assumption in many socio-economic models. The goal of this paper is to illustrate the difficulties involved in providing a correct definition of what a rational (or irrational) agent is. In this paper we describe two frameworks that employ different approaches for analyzing bounded rationality. The first is a spatial segregation set-up that encompasses two optimization methodologies: backward induction and forward induction. The main result is that, even under the same state of knowledge, rational and non-rational agents may match their actions. The second framework elaborates on the relationship between irrationality and informational restrictions. We use the beauty contest (Nagel, 1995) as a device to explain this relationship.

Keywords: Behavioral economics; bounded rationality; partial information (search for similar items in EconPapers)
JEL-codes: C61 C73 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-cbe, nep-cis, nep-evo, nep-hme and nep-upt
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Working Paper: Bounded Rationality (2010) Downloads
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