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Bounded rationality and perfect rationality: psychology into economics

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  • Schilirò, Daniele

Abstract

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 tries to highlight some well-known limits of the classical theory of rational choiceand compare this theory of choice with a different notion of rationality, bounded rationality, and with an approach that seeks to combine economics and psychology, based on experimental data, which established itself as cognitive or behavioral economics. The work also examines part of the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. A final reference is dedicated to neuroeconomics that is gaining more and more ground in the analysis of economic behavior.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41663.

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Date of creation: Sep 2012
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Handle: RePEc:pra:mprapa:41663

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Keywords: Bounded rationality; procedural rationality; rational choice; behavioral economics; neuroeconomics;

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  1. Rabin, Matthew, 2002. "A Perspective on Psychology and Economics," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt2wr3z049, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2813, C.E.P.R. Discussion Papers.
  3. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
  4. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers, University of California at Berkeley 97-251, University of California at Berkeley.
  5. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(1), pages 221-234, Winter.
  6. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, American Economic Association, vol. 69(4), pages 493-513, September.
  7. Ariel Rubinstein, 1997. "Modeling Bounded Rationality," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262681005, December.
  8. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
  9. 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, Elsevier, vol. 39(3), pages 376-383, June.
  10. Graziano, Mario & Schilirò, Daniele, 2012. "Rationality and choices in economics: behavioral and evolutionary approaches," MPRA Paper, University Library of Munich, Germany 35971, University Library of Munich, Germany.
  11. Schilirò, Daniele, 2012. "Bounded rationality: psychology, economics and the financial crisis," MPRA Paper, University Library of Munich, Germany 40280, University Library of Munich, Germany.
  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  13. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  14. Todd, Peter M. & Gigerenzer, Gerd, 2003. "Bounding rationality to the world," Journal of Economic Psychology, Elsevier, Elsevier, vol. 24(2), pages 143-165, April.
  15. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive, David K. Levine 7605, David K. Levine.
  16. Schilirò, Daniele, 2005. "Economia della conoscenza,istituzioni e sviluppo economico
    [Knowledge-based economy, institutions and economic development]
    ," MPRA Paper, University Library of Munich, Germany 31492, University Library of Munich, Germany.
  17. Madalina CONSTANTINESCU, 2010. "Neuroeconomics and Decision Making Process," Theoretical and Practical Research in Economic Fields, ASERS Publishing, ASERS Publishing, vol. 0(2), pages 210 - 218, December.
  18. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, American Economic Association, vol. 93(5), pages 1449-1475, December.
  19. 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, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  20. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(2), pages 392-406, April.
  21. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(4), pages S251-78, October.
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Cited by:
  1. Schilirò, Daniele, 2012. "Bounded rationality: psychology, economics and the financial crisis," MPRA Paper, University Library of Munich, Germany 40280, University Library of Munich, Germany.

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