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Bounded Rationality

Author

Listed:
  • Penelope Hernandez

    () (ERI-CES)

  • Coralio Ballester

    () (University Alicante)

Abstract

The observation of the actual behavior by economic decision makers in the lab and in the field justifies that bounded rationality has been a generally accepted assumption in many socio-economic models. The goal of this paper is to illustrate the difficulties involved in providing a correct definition of what a rational (or irrational) agent is. In this paper we describe two frameworks that employ different approaches for analyzing bounded rationality. The first is a spatial segregation set-up that encompasses two optimization methodologies: backward induction and forward induction. The main result is that, even under the same state of knowledge, rational and non-rational agents may match their actions. The second framework elaborates on the relationship between irrationality and informational restrictions. We use the beauty contest (Nagel, 1995) as a device to explain this relationship.

Suggested Citation

  • Penelope Hernandez & Coralio Ballester, 2011. "Bounded Rationality," Discussion Papers in Economic Behaviour 0111, University of Valencia, ERI-CES.
  • Handle: RePEc:dbe:wpaper:0111
    as

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    File URL: https://www.uv.es/erices/RePEc/WP/2011/0111.pdf
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    Other versions of this item:

    • Coralio Ballester & Penélope Hernández, 2010. "Bounded Rationality," ThE Papers 10/10, Department of Economic Theory and Economic History of the University of Granada..

    References listed on IDEAS

    as
    1. Juan Miguel Benito & Pablo Branas-Garz & Penelope Hernandez & Juan A. Sanchis, 2011. "Strategic behavior in Schelling dynamics: A new result and experimental evidence," Working Papers 11-14, Chapman University, Economic Science Institute.
    2. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
    3. Herbert A. Simon, 1991. "Bounded Rationality and Organizational Learning," Organization Science, INFORMS, vol. 2(1), pages 125-134, February.
    4. Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-493, May.
    5. Govindan, Srihari & Robson, Arthur J., 1998. "Forward Induction, Public Randomization, and Admissibility," Journal of Economic Theory, Elsevier, vol. 82(2), pages 451-457, October.
    6. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    7. Ballester, Coralio, 2004. "NP-completeness in hedonic games," Games and Economic Behavior, Elsevier, vol. 49(1), pages 1-30, October.
    8. Ariel Rubinstein, 1997. "Modeling Bounded Rationality," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262681005, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Behavioral economics; bounded rationality; partial information;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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