Bounded rationality: psychology, economics and the financial crisis

Daniele Schiliro'

MPRA Paper from University Library of Munich, Germany

Abstract: Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice. In particular, the present paper will focus on the concept of bounded rationality. The work also makes some references to behavioral economics and to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. Finally, following the approch of Simon, the paper proposes an analytical model to describe the behaviour of agents which are rationally bounded, risk averse and loss averse, emphasizing the relationship between psychology and economics which helps to explain the crisis in financial markets.

Keywords: Bounded rationality; rational choice; cognitive economics; behavioral finance; risk aversion (search for similar items in EconPapers)
JEL-codes: B52 C60 D81 D83 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-hpe, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: BOUNDED RATIONALITY: PSYCHOLOGY, ECONOMICS AND THE FINANCIAL CRISES (2013)
Working Paper: Bounded rationality:psychology, economics and the financial crises (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40280

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