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.
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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:
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- 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)
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