Bounded Rationality

Coralio Ballester and Penelope Hernandez ()

No 10/10, ThE Papers from Department of Economic Theory and Economic History of the University of Granada.

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.

Pages: 21 pages
Date: 2010-10-01
New Economics Papers: this item is included in nep-cbe, nep-evo and nep-upt
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http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers10_10.pdf (application/pdf)

Related works:
Working Paper: Bounded Rationality (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:gra:wpaper:10/10

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