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Natural Rationality

Author

Listed:
  • V. M. Darley
  • S. A. Kauffman

Abstract

We propose a method for modelling economic systems in which outcomes depend locally on the predictions that agents make of other agents. We develop populations games in which each agent adaptively searches for a good model of its environment. We demonstrate that such systems can exhibit persistent dynamics, cyclic oscillations between low and high complexity states, and other complex, yet endogenous, phenomena. We propose that these `adaptively rational' agents as a natural extension of rational expectations, suitable when mutual consistency is not realistic. We discuss the connections between our work and the programs of bounded rationality, evolutionary game theory, and models motivated by statistical mechanics.

Suggested Citation

  • V. M. Darley & S. A. Kauffman, 1996. "Natural Rationality," Working Papers 96-08-071, Santa Fe Institute.
    • Handle: RePEc:wop:safiwp:96-08-071
    as

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    References listed on IDEAS

    as
    1. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-1071, September.
    2. Blume Lawrence E., 1993. "The Statistical Mechanics of Strategic Interaction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 387-424, July.
    3. Brock, W.A. & Durlauf, S.N., 1995. "Discrete Choice with Social Interactions I: Theory," Working papers 9521, Wisconsin Madison - Social Systems.
    4. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695.
    5. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812.
    6. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-493, May.
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