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Bounded arbitrage and nearly rational behavior

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  • Leandro Nascimento

    (Universidade de Brasília)

Abstract

We establish the equivalence between a principle of almost absence of arbitrage opportunities and nearly rational decision-making. The implications of such principle are considered in the context of the aggregation of probabilistic opinions and of stochastic choice functions. In the former a bounded arbitrage principle and its equivalent form as an approximately Pareto condition are shown to bound the difference between the collective probabilistic assessment of a set of states and a linear aggregation rule on the individual assessments. In the latter we show that our general principle of limited arbitrage opportunities translates into a weakening of the McFadden–Richter axiom of stochastic rationality, and gives an upper bound for the minimum distance of a stochastic choice function to another in the class of random utility maximization models.

Suggested Citation

  • Leandro Nascimento, 2024. "Bounded arbitrage and nearly rational behavior," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 77(4), pages 941-974, June.
  • Handle: RePEc:spr:joecth:v:77:y:2024:i:4:d:10.1007_s00199-023-01515-y
    DOI: 10.1007/s00199-023-01515-y
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    References listed on IDEAS

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    Cited by:

    1. Leandro Nascimento, 2025. "On the stability of utilitarian aggregation," Papers 2504.17061, arXiv.org.

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    More about this item

    Keywords

    Arbitrage; Aggregation of probability measures; Stochastic choice;
    All these keywords.

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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