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.

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.

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.

Jean Tirole: The political economy of corporate finance (On the book by J. Tirole “The theory of corporate finance”)

2017 ◽  
pp. 128-141
Author(s):  
N. Ranneva
Keyword(s):  
Economic Theory ◽  
Political Economy ◽  
Graduate Students ◽  
Corporate Finance ◽  
Critical Review ◽  
The Political ◽  
Institutional Economic ◽  
New Type ◽  
Finance Theory ◽  
Empirical Material

The present article undertakes a critical review of the new book of Jean Tirole, the winner of the 2014 Nobel Prize in Economics, “The theory of cor- porate finance”, which has recently been published in Russian. The book makes a real contribution to the profession by summarizing the whole field of corporate finance and bringing together a big body of research developed over the last thirty years. By simplifying modeling, using unified analytical apparatus, undertaking reinterpretation of many previously received results, and structuring the material in original way Tirole achieves a necessary unity and simplicity in exposition of extremely heterogeneous theoretical and empirical material. The book integrates the new institutional economic theory into classical corporate finance theory and by doing so contributes to making a new type of textbook, which is quite on time and is likely to become essential reading for all graduate students in corporate finance and microeconomics and for everyone interested in these disciplines.

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.

B is for Bias

2014 ◽  
Vol 3 (2) ◽  
pp. 35-47
Author(s):  
Calin Valsan
Keyword(s):  
Economic Theory ◽  
Rational Expectations ◽  
Economic Environment ◽  
Rational Agents ◽  
Economic Agents ◽  
Behavioral Biases ◽  
The Social ◽  
Modern Economic

Standard economic theory assumes rational agents. Individuals are expected to have rational expectations and constantly optimize their choices. Modern economic and financial theory is build under the assumption of rationality. There is plenty of evidence from psychology, however, that individuals are biased and rely heavily on heuristics in order to make decisions. Yet, this is not a mere fluke, a behavioral oddity. Because the social and economic environment in which individuals evolve is complex, behavioral biases represent evolutionary adaptations allowing economic agents to deal with undecidability and computational irreducibility.

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 Note historique sur les effets externes

2009 ◽  
Vol 51 (3) ◽  
pp. 420-433 ◽  
Author(s):  
Jean-Jacques Laffont
Keyword(s):  
Game Theory ◽  
Economic Theory ◽  
The Other ◽  
Historical Note ◽  
Second Best ◽  
Economic Agents ◽  
Pecuniary Externalities ◽  
Artificial Markets ◽  
Technological Externalities ◽  
The Creation

Abstract This historical note describes from Sidgwick on the evolution of the concepts related to the interdependencies of economic agents outside markets. In a first section, we show how the concept of externality introduced by some precursors had later to reemerge from the confuse discussion of "empty boxes". The second sector clarifies the distinction between two avenues of research, the first one associated with pecuniary externalities, the other one associated with technological externalities. Coase's criticisms of Pigouvian policy are developed in section 3. In a last section we gather the main results obtained recently by economic theory in this field. In particular we discuss the difficulties of the creation of artificial markets, the second best approaches often needed in a Pigouvian policy, results of game theory in models with externalities, planning with externalities.

The Causes and Consequences of Terrorism in Africa

2014 ◽  
pp. 723-738
Author(s):  
Juliet U. Elu ◽  
Gregory N. Price
Keyword(s):  
Economic Theory ◽  
Rational Choice ◽  
Choice Model ◽  
Costs And Benefits ◽  
African Countries ◽  
Economic Agents ◽  
The Past ◽  
Rational Choice Model ◽  
Economic Good ◽  
Counterterrorism Policy

African countries have experienced relatively high levels of terrorism. Terrorism has been linked to the theory of deprivation, but the extent to which terrorism is an economic good can be explained using a rational choice model of economic agents. Terrorism is also possibly motivated largely by existential other-worldly goals. If terrorism reflects a solution to a problem with identifiable costs and benefits that accord with the behavior assumed in economic theory, then it may be possible to contain terrorism by altering those costs and benefits. Terrorism as a manifestation of conflict could be a historically persistent phenomena with roots in the past. This chapter examines the causes and consequences of terrorism in Africa, and considers the extent to which existing evidence rationalizes the various explanations for it, and its implications for counterterrorism policy in Africa.

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.

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