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Economics and psychology.Perfect rationality versus bounded rationality

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  • SchilirĂ², Daniele

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 and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34292.

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Date of creation: Oct 2011
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Handle: RePEc:pra:mprapa:34292

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Keywords: Bounded rationality; procedural rationality; rational choice; cognitive economics;

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  1. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
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  5. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
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  7. Novarese, Marco & Castellani, Marco & Di Giovinazzo, Viviana, 2009. "Procedural Rationality and Happiness," MPRA Paper 18290, University Library of Munich, Germany.
  8. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  9. Aldo MONTESANO, 2005. "La nozione di razionalita' in economia," Rivista Italiana degli Economisti, SIE - Societa' Italiana degli Economisti (I), vol. 10(1), pages 23-42, April.
  10. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
  11. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
  12. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  13. Todd, Peter M. & Gigerenzer, Gerd, 2003. "Bounding rationality to the world," Journal of Economic Psychology, Elsevier, vol. 24(2), pages 143-165, April.
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  1. EconPapers: Economics and psychology.Perfect rationality versus bounded rationality
    by inobrec in Knowledge Team on 2011-11-14 21:28:15

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