Individual Irrationality and Aggregate Outcomes

Ernst Fehr and Jean-Robert Tyran

No 05-09, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.

Keywords: bounded rationality; strategic interaction; strategic complementarity (search for similar items in EconPapers)
JEL-codes: D01 D50 D84 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2005-07
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-hpe and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (122)

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Journal Article: Individual Irrationality and Aggregate Outcomes (2005)
Working Paper: Individual Irrationality and Aggregate Outcomes
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0509

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