From full to bounded rationality: The limits of unlimited rationality

Werner Güth () and Hartmut Kliemt

No 2001,12, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: Deriving advice that can in fact be utilized by boundedly rational decision makers is a central function of modeling choice making. We illustrate why this role is not being fulfilled well by standard models of full rationality and that theories of bounded rationality are needed not only for better predictions, but also for developing better advice. Our main point is that one cannot succeed here without studying how theories of bounded rationality causally influence the behavior of boundedly rational individuals. In view of such a causal role of theories we discuss how advice of a theory of boundedly rational behavior can become known, be followed among boundedly rational individuals and still be good advice.

Date: 2001
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