AbstractThe observation of the actual behavior by economic decision makers in the lab and in the field justifies that bounded rationality has been a generally accepted assumption in many socio-economic models. The goal of this paper is to illustrate the difficulties involved in providing a correct definition of what a rational (or irrational) agent is. In this paper we describe two frameworks that employ different approaches for analyzing bounded rationality. The first is a spatial segregation set-up that encompasses two optimization methodologies: backward induction and forward induction. The main result is that, even under the same state of knowledge, rational and non-rational agents may match their actions. The second framework elaborates on the relationship between irrationality and informational restrictions. We use the beauty contest (Nagel, 1995) as a device to explain this relationship.
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Bibliographic InfoPaper provided by University of Valencia, ERI-CES in its series Discussion Papers in Economic Behaviour with number 0111.
Date of creation: Jan 2011
Date of revision:
Behavioral economics; bounded rationality; partial information;
Other versions of this item:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-19 (All new papers)
- NEP-CBE-2011-02-19 (Cognitive & Behavioural Economics)
- NEP-CIS-2011-02-19 (Confederation of Independent States)
- NEP-EVO-2011-02-19 (Evolutionary Economics)
- NEP-HME-2011-02-19 (Heterodox Microeconomics)
- NEP-UPT-2011-02-19 (Utility Models & Prospect Theory)
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