Incorporating Limited Rationality into Economics

2013 ◽  
Vol 51 (2) ◽  
pp. 528-543 ◽  
Author(s):  
Matthew Rabin
Keyword(s):  
Economic Theory ◽  
Bounded Rationality ◽  
Optimization Models ◽  
Neoclassical Theory ◽  
Full Rationality

Harstad and Selten (this forum) raise interesting questions about the relative promise of optimization models and bounded-rationality models in making progress in economics. This article builds from their analysis by indicating the potential for using neoclassical (broadly defined) optimization models to integrate insights from psychology on the limits to rationality into economics. I lay out an approach to making (imperfect and incremental) improvements over previous economic theory by incorporating greater realism while attempting to maintain the breadth of application, the precision of predictions, and the insights of neoclassical theory. I then discuss how many human limits to full rationality are, in fact, well understood in terms of optimization. (JEL B49, D01, D03, D81, D84)

Incorporating limited rationality into economics

2014 ◽  
pp. 45-65 ◽  
Author(s):  
M. Rabin
Keyword(s):  
Economic Theory ◽  
Bounded Rationality ◽  
Optimization Models ◽  
Neoclassical Theory ◽  
Full Rationality

Harstad and Selten (this forum) raise interesting questions about the relative promise of optimization models and bounded-rationality models in making progress in economics. This article builds from their analysis by indicating the potential for using neoclassical (broadly defined) optimization models to integrate insights from psychology on the limits to rationality into economics. I lay out an approach to making (imperfect and incremental) improvements over previous economic theory by incorporating greater realism while attempting to maintain the breadth of application, the precision of predictions, and the insights of neoclassical theory. I then discuss how many human limits to full rationality are, in fact, well understood in terms of optimization.

The Model of Bounded Rationality: a New Methodological Tool of Economic Theory

2021 ◽  
Vol 13 (2) ◽  
Author(s):  
Maya Tsoklinova
Keyword(s):  
Economic Theory ◽  
Bounded Rationality ◽  
Neoclassical Theory ◽  
Economic Agents ◽  
Market Participants ◽  
Model Research ◽  
Methodological Tool ◽  
The Moment ◽  
Rational Behaviour ◽  
Empirical Material

The main purpose of this article is to study and analyze the economic behaviour of market participants in real conditions, and to outline the very natural trait of individuals to show bounded rationality. The theoretical framework of bounded rationality is presented, and a comparative analysis is carried out between the neoclassical theory of rational behaviour and the concept of quasi-rational economic agents according to behavioural economics. Special emphasis is placed on the correlation between the decisionmaking process and the concept of limited rationality. This article confirms the thesis that the model of the rational economic individual is not the best model. Research in this area proves that this model has great imperfections, but, at the moment, the empirical material is still not enough to create another, newer and practically applicable model of behaviour of the real economic person, which is characterized by bounded rationality.

A Realist Perspective on Contemporary "Economic Theory" (Foreword by O. Ananyin)

2006 ◽  
pp. 75-98 ◽  
Author(s):  
T. Lawson
Keyword(s):  
Economic Theory ◽  
Life Events ◽  
Alternative Model ◽  
Economic Life ◽  
Social Phenomenon ◽  
Methodological Issues ◽  
Neoclassical Theory ◽  
Fundamental Feature ◽  
Major Powers ◽  
Realist Perspective

The author elaborates on methodological issues of current tendencies in neoclassical theory and demonstrates the necessity of an alternative model of science, which he calls "realist". According to this perspective, constant and regular conjunctions of economic life events should not be the main object of analysis. Rather, the author proposes to consider structures and mechanisms governing events in question. Instead of deductivism, which, as Lawson believes, is a fundamental feature of orthodox economics, the abductive method of economic explanation is proposed that entails investigation of major powers, on which any social phenomenon depends. Society is thereby regarded not as a closed, but rather as an open system.

scholarly journals The (Non) Economic Properties of the Law

Games ◽  
2021 ◽  
Vol 12 (1) ◽  
pp. 26
Author(s):  
Leo Katz ◽  
Alvaro Sandroni
Keyword(s):  
Economic Theory ◽  
Bounded Rationality ◽  
Budget Constraints ◽  
The Law

This paper shows that the logical properties of constraints imposed by law are fundamentally different from other constraints considered in economics such as budget constraints and bounded rationality constraints, such as the ones based on inattention or shortlisting. This suggests that to fully incorporate law into economics may require a revision of economic theory.

scholarly journals Economic Decisions and Simon’s Notion of Bounded Rationality

2018 ◽  
Vol 11 (7) ◽  
pp. 64 ◽  
Author(s):  
Daniele Schilirò
Keyword(s):  
Bounded Rationality ◽  
Behavioral Model ◽  
Economic Literature ◽  
Herbert Simon ◽  
Research Activity ◽  
Procedural Rationality ◽  
Neoclassical Theory ◽  
Theoretical Contribution ◽  
Economic Decisions ◽  
Satisficing Behavior

Decision making in economics has been always intertwined with the concept of rationality. However, neoclassical economic literature has been dominated by a specific notion of rationality, namely, perfect rationality, characterized by the assumption of consistency and by the maximization hypothesis. Herbert Simon, in his long research activity, questioned this concept of perfect or global rationality, suggesting a different vision, based on empirical evidence and regarding an individual’s choices. He challenged the neoclassical theory of global rationality, suggesting his notion of bounded rationality, a satisficing (instead of optimizing) behavior, and the relevance of procedural rationality to understand the process of thought of decision makers.Thus, this paper focuses on Simon’s notion of bounded rationality, since bounded rationality remains the hallmark of his theoretical contribution. First, the paper examines the economic decision process in the neoclassical theory and Simon’s notion of bounded rationality. Then, it analyzes in depth Simon’s behavioral model of rational choice, underlining the relevance of satisficing behavior and procedural rationality. Finally, it suggests an assessment of the concept of bounded rationality.

scholarly journals An Approximation Theorem for Vector Equilibrium Problems under Bounded Rationality

Mathematics ◽  
2020 ◽  
Vol 8 (1) ◽  
pp. 45
Author(s):  
Wensheng Jia ◽  
Xiaoling Qiu ◽  
Dingtao Peng
Keyword(s):  
Exact Solution ◽  
Bounded Rationality ◽  
Equilibrium Problems ◽  
Approximation Theorem ◽  
Optimization Problems ◽  
Vector Equilibrium Problems ◽  
Special Cases ◽  
Full Rationality ◽  
Vector Equilibrium ◽  
Special Case

In this paper, our purpose is to investigate the vector equilibrium problem of whether the approximate solution representing bounded rationality can converge to the exact solution representing complete rationality. An approximation theorem is proved for vector equilibrium problems under some general assumptions. It is also shown that the bounded rationality is an approximate way to achieve the full rationality. As a special case, we obtain some corollaries for scalar equilibrium problems. Moreover, we obtain a generic convergence theorem of the solutions of strictly-quasi-monotone vector equilibrium problems according to Baire’s theorems. As applications, we investigate vector variational inequality problems, vector optimization problems and Nash equilibrium problems of multi-objective games as special cases.

The Rule of Experts

2015 ◽  
pp. 342-363
Author(s):  
Roger Koppl
Keyword(s):  
Economic Theory ◽  
Medical Research ◽  
Bounded Rationality ◽  
Division Of Labor ◽  
Choice Theory ◽  
Individual Autonomy ◽  
Agent Based ◽  
Engineering Studies ◽  
Law And Justice ◽  
Epistemic Systems

The division of labor creates a division of knowledge, which creates expertise and the problem of experts. The rule of experts exists when experts have an epistemic monopoly and choose for others. Generally, experts may have power that threatens individual autonomy. Competition tends to dissipate the power of experts, although the details of market structure matter. Even well-meaning experts may fail because they have bounded rationality. Epistemic monopoly increases the risks of error and expert failure; competition reduces them. Information choice theory is an economic theory of experts. It may help in the design of epistemic systems, which are agent-based processes viewed from perspective of their knowledge properties. Epistemic engineering studies the design principles of epistemic systems. Economists should consider the epistemic properties of alternative institutions to minimize the problem of experts and avoid the rule of experts. Applications discussed include religion, law and justice, and medical research.

Women and the Labor Market

2017 ◽  
pp. 622-642
Author(s):  
Joyce P. Jacobsen
Keyword(s):  
Economic Theory ◽  
Political Economy ◽  
Labor Market ◽  
Labor Economics ◽  
Empirical Work ◽  
Neoclassical Theory ◽  
Quarter Century ◽  
Feminist Economics ◽  
The Past ◽  
Feminist Perspectives

This chapter first outlines the feminist economics intellectual project. While feminist economics has its roots in nineteenth-century political economy, it has undergone most of its development within the past quarter century. The chapter explains the application of feminist principles to two standard labor economics topics: labor supply and earnings, and the more specifically feminist topic of provision of caring labor. The differences between standard neoclassical theory and predictions, and feminist economic theory and predictions, are outlined in each section. The chapter closes with some feminist perspectives on economic empiricism and the methodological underpinnings of empirical work in labor economics.

Why Institutions Matter: From Economic Development to Development Economics

2014 ◽  
Vol 22 (3) ◽  
pp. 469-490 ◽  
Author(s):  
Cosmin Marinescu
Keyword(s):  
Economic Growth ◽  
Economic Theory ◽  
Economic Development ◽  
Development Economics ◽  
Capital Accumulation ◽  
Value Systems ◽  
Neoclassical Theory ◽  
Useful Knowledge ◽  
Essential Step ◽  
Production Growth

The last few decades have seen a significant growth of economists’ interest in studying institutions. They are generally preoccupied with explaining institutions using instruments that are specific for an economist, and especially with discerning the significance of institutions for both economic development and development economics. Therefore, the integration of institutions into economic theory is an essential step in our continuous attempt to refine and improve scientific explanations. The neoclassical theory of economic growth only identifies the conditions needed for material production growth, such as capital accumulation and technical progress. In order to explain ‘why’ people save, invest, learn and seek useful knowledge, special attention must also be paid to institutional and value systems.

scholarly journals What is the true meaning behind the stochastic hypothesis which assert that E(ε)=0 ?

2017 ◽  
Vol 1 (2) ◽  
pp. 45-51
Author(s):  
Tarek DJEDDI ◽  
Said BRIKA ◽  
Achour HAIDOUCHI
Keyword(s):  
Economic Theory ◽  
Bounded Rationality ◽  
Rational Expectations ◽  
Expectations Hypothesis ◽  
Equal Zero ◽  
The Past ◽  
True Meaning ◽  
Before And After ◽  
Rationality Assumption ◽  
Classical Hypothesis

The aim of this Paper is to examine the meaning about the classical hypothesis which claim that the error of expectation equal zero, by mentioning all theories of expectations before and after the REH. The rational expectations paradigm has dominated the field of economics ever since it was introduced some fifty years ago. Recently research in heterogeneous expectations, bounded rationality, and models of learning have gained leverage, and focus has shifted away from the rational expectations hypothesis. Despite these developments over the past few decades, the rational expectations paradigm is still very much the standard way of handling uncertainty in economic theory, and often the rationality assumption is not seriously questioned.

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