Behavioural Anomalies, Bounded Rationality and Simple Heuristics

Suren Basov, Liam Blanckenberg and Lata Gangadharan

No 1012, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: The use of bounded rationality in explaining economic phenomena has attracted growing attention. In spite of this, there is still considerable disagreement regarding the meaning of bounded rationality. Basov (2005) argues that when modeling boundedly rational behaviour it is desirable to start with an explicit formulation of the learning process. A complete understanding of the boundedly rational decision-making process requires development of an evolutionary-dynamic model which can give rise to such learning processes. Evolutionary dynamics implies that individuals use heuristics to adjust their choices in light of past experiences, moving in the direction that appears most beneficial, where these adjustment rules are assumed ‘hardwired’ into human cognition through the process of biological evolution. In this paper we elaborate on the latter point by building a model of evolutionary selection relevant to heuristics. We show that in addition to explaining the origin of learning rules this approach also sheds light on some well documented preference anomalies.

Keywords: Bounded Rationality; Heuristics; Replicator Dynamics (search for similar items in EconPapers)
JEL-codes: C0 D7 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007
New Economics Papers: this item is included in nep-cbe and nep-evo
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1012

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