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Bounded Rationality in Economics: A Game Theorist's View

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Author Info
Matsushima, Hitoshi (Faculty of Economics, University of Tokyo.)

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Abstract

In this paper, we will argue that it is essential to incorporate bounded rationality into game theory. Game theory has been applied to economics such as industrial organization on the basis of the naïve interpretation of game theory, which requires players to be ideally rational in an extremely unrealistic way. We will stress the importance of establishing the perceptive interpretation of game theory by taking boundedly rational players' inductive reasoning processes into account. We will explain my recent work, Matsushima(1997), which shows that the subjective games perceived by players in the long run are entirely different from the true objective game, and are trivial games in the sense that there exists a strictly dominant and subjectively Pareto-efficient strategy profile.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number 97-F-10.

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Length: 20 pages
Date of creation: Feb 1997
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Handle: RePEc:tky:fseres:97f10

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References listed on IDEAS
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.:
  1. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June. [Downloadable!] (restricted)
  2. Chaim Fershtman & Ehud Kalai, 1993. "Complexity Considerations and Market Behavior," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 224-235, Summer. [Downloadable!] (restricted)
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  3. John Hey, . "Experiments and the Economics of Individual Decision Making Under Risk and Uncertainty," Discussion Papers 95/49, Department of Economics, University of York.
  4. Vincent P. Crawford, 1995. "Theory and Experiment in the Analysis of Strategic Interaction," University of California at San Diego, Economics Working Paper Series 95-37, Department of Economics, UC San Diego.
  5. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January. [Downloadable!] (restricted)
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  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  7. Canning, David, 1992. "Rationality, Computability, and Nash Equilibrium," Econometrica, Econometric Society, vol. 60(4), pages 877-88, July. [Downloadable!] (restricted)
  8. Rubinstein, Ariel, 1991. "Comments on the Interpretation of Game Theory," Econometrica, Econometric Society, vol. 59(4), pages 909-24, July. [Downloadable!] (restricted)
  9. Mehta, Judith & Starmer, Chris & Sugden, Robert, 1994. "The Nature of Salience: An Experimental Investigation of Pure Coordination Games," American Economic Review, American Economic Association, vol. 84(3), pages 658-73, June. [Downloadable!] (restricted)
  10. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September. [Downloadable!] (restricted)
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  11. Abreu, Dilip & Rubinstein, Ariel, 1988. "The Structure of Nash Equilibrium in Repeated Games with Finite Automata," Econometrica, Econometric Society, vol. 56(6), pages 1259-81, November. [Downloadable!] (restricted)
  12. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May. [Downloadable!] (restricted)
  13. Franklin M. Fisher, 1989. "Games Economists Play: A Noncooperative View," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 113-124, Spring. [Downloadable!] (restricted)
  14. Aumann, Robert & Brandenburger, Adam, 1995. "Epistemic Conditions for Nash Equilibrium," Econometrica, Econometric Society, vol. 63(5), pages 1161-80, September. [Downloadable!] (restricted)
  15. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229. [Downloadable!] (restricted)
  16. Lipman, Barton L, 1991. "How to Decide How to Decide How to. . . : Modeling Limited Rationality," Econometrica, Econometric Society, vol. 59(4), pages 1105-25, July. [Downloadable!] (restricted)
  17. Peltzman, Sam, 1991. "The Handbook of Industrial Organization: Review Article," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 201-17, February. [Downloadable!] (restricted)
  18. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June. [Downloadable!] (restricted)
  19. Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Blackwell Publishing, vol. 58(1), pages 1-14, January. [Downloadable!] (restricted)
  20. Rubinstein, Ariel, 1993. "On Price Recognition and Computational Complexity in a Monopolistic Model," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 473-84, June. [Downloadable!] (restricted)
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  21. Selten, Reinhard, 1991. "Evolution, learning, and economic behavior," Games and Economic Behavior, Elsevier, vol. 3(1), pages 3-24, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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.)

  1. Tilman Slembeck, 1999. "Low Information Games - Experimental Evidence on Learning in Ultimatum Bargaining," Experimental 9905001, EconWPA. [Downloadable!]
  2. Hitoshi Matsushima, 1998. "Learning about Stochastic Payoff Structures," CIRJE F-Series CIRJE-F-7, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  3. Hitoshi Matsushima, 1998. "Towards a Theory of Subjective Games," CIRJE F-Series CIRJE-F-9, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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