Bounded rationality: psychology, economics and the financial crisis
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. In particular, the present paper will focus on the concept of bounded rationality. The work also makes some references to behavioral economics and to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. Finally, following the approch of Simon, the paper proposes an analytical model to describe the behaviour of agents which are rationally bounded, risk averse and loss averse, emphasizing the relationship between psychology and economics which helps to explain the crisis in financial markets.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40280.
Date of creation: Jul 2012
Date of revision:
Bounded rationality; rational choice; cognitive economics; behavioral finance; risk aversion;
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
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-CBE-2012-08-23 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-08-23 (Evolutionary Economics)
- NEP-HPE-2012-08-23 (History & Philosophy of Economics)
- NEP-NEU-2012-08-23 (Neuroeconomics)
- NEP-UPT-2012-08-23 (Utility Models & Prospect Theory)
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