Economics and psychology.Perfect rationality versus bounded rationality
AbstractClassical 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 34292.
Date of creation: Oct 2011
Date of revision:
Bounded rationality; procedural rationality; rational choice; cognitive economics;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Institutional; Evolutionary
- C00 - Mathematical and Quantitative Methods - - General - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-CBE-2011-11-01 (Cognitive & Behavioural Economics)
- NEP-EVO-2011-11-01 (Evolutionary Economics)
- NEP-HME-2011-11-01 (Heterodox Microeconomics)
- NEP-HPE-2011-11-01 (History & Philosophy of Economics)
- NEP-NEU-2011-11-01 (Neuroeconomics)
- NEP-UPT-2011-11-01 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
- H. M. Shefrin & Richard Thaler, 1977.
"An Economic Theory of Self-Control,"
NBER Working Papers
0208, National Bureau of Economic Research, Inc.
- Simon, Herbert A, 1979.
"Rational Decision Making in Business Organizations,"
American Economic Review,
American Economic Association, vol. 69(4), pages 493-513, September.
- Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
- Novarese, Marco & Castellani, Marco & Di Giovinazzo, Viviana, 2009.
"Procedural Rationality and Happiness,"
18290, University Library of Munich, Germany.
- Castellani, Marco & Di Giovinazzo, Viviana & Novarese, Marco, 2010. "Procedural rationality and happiness," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(3), pages 376-383, June.
- 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.
- 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.
- Todd, Peter M. & Gigerenzer, Gerd, 2003. "Bounding rationality to the world," Journal of Economic Psychology, Elsevier, vol. 24(2), pages 143-165, April.
- Rabin, Matthew, 1997.
"Psychology and Economics,"
Department of Economics, Working Paper Series
qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
- 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.
- David Genesove & Christopher Mayer, .
"Loss Aversion and Seller Behavior: Evidence from the Housing Market,"
Zell/Lurie Center Working Papers
323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
- 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.
- Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- EconPapers: Economics and psychology.Perfect rationality versus bounded rationality
by inobrec in Knowledge Team on 2011-11-14 21:28:15
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.