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Lying for the Greater Good: Bounded Rationality in a Team

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  • Oktay Sürücü

    () (Universität Bielefeld, Germany)

Abstract

This paper is concerned with the interaction between fully and boundedly rational agents in situations where their interests are perfectly aligned. The cognitive limitations of the boundedly rational agent do not allow him to fully understand the market conditions and lead him to take non-optimal decisions in some situations. Using categorization to model bounded rationality, we show that the fully rational agent can nudge, i.e., he can manipulate the information he sends and decrease the expected loss caused by the boundedly rational agent. Assuming different types for the boundedly rational agent, who differ only in the categories used, we show that the fully rational agent may learn the type of the boundedly rational agent along their interaction. Using this additional information, the outcome can be improved and the amount of manipulated information can be decreased. Furthermore, as the length of the interaction increases the probability that the fully rational agent learns the type of the boundedly rational agent grows.

Suggested Citation

  • Oktay Sürücü, 2014. "Lying for the Greater Good: Bounded Rationality in a Team," The International Journal of Economic Behavior - IJEB, Faculty of Business and Administration, University of Bucharest, vol. 4(1), pages 151-163.
  • Handle: RePEc:but:ijebfa:v:4:y:2014:i:1:p:151-163
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    References listed on IDEAS

    as
    1. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
    2. Fryer Roland & Jackson Matthew O., 2008. "A Categorical Model of Cognition and Biased Decision Making," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-44, February.
    3. Hong, Lu & Page, Scott, 2009. "Interpreted and generated signals," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2174-2196, September.
    4. Michele Piccione & Ariel Rubinstein, 2003. "Modeling the Economic Interaction of Agents With Diverse Abilities to Recognize Equilibrium Patterns," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 212-223, March.
    5. James Dow, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 1-14.
    6. B. Luppi, 2006. "Price Competition over Boundedly Rational Agents," Working Papers 565, Dipartimento Scienze Economiche, Universita' di Bologna.
    7. 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 473-484, June.
    8. Yuxin Chen & Ganesh Iyer & Amit Pazgal, 2010. "Limited Memory, Categorization, and Competition," Marketing Science, INFORMS, vol. 29(4), pages 650-670, 07-08.
    9. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bounded rationality; categorization; nudging; learning.;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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