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.
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.:
- Ballester, Coralio, 2004. "NP-completeness in hedonic games," Games and Economic Behavior, Elsevier, vol. 49(1), pages 1-30, October.
- Ariel Rubinstein, 1997.
"Modeling Bounded Rationality,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262681005, June.
- Govindan, Srihari & Robson, Arthur J., 1998. "Forward Induction, Public Randomization, and Admissibility," Journal of Economic Theory, Elsevier, vol. 82(2), pages 451-457, October.
- Juan Miguel Benito & Pablo Branas-Garz & Penelope Hernandez & Juan A. Sanchis, 2011.
"Strategic behavior in Schelling dynamics: A new result and experimental evidence,"
11-14, Chapman University, Economic Science Institute.
- Juan Miguel Benito & Pablo Brañas-Garza & Penélope Hernández & Juan A. Sanchis, 2012. "Strategic behavior in Schelling dynamics: A new result and experimental evidence," Discussion Papers in Economic Behaviour 0312, University of Valencia, ERI-CES.
- Schelling, Thomas C, 1969. "Models of Segregation," American Economic Review, American Economic Association, vol. 59(2), pages 488-93, May.
- Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
- Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
When requesting a correction, please mention this item's handle: RePEc:dbe:wpaper:0111. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Emilio Calvo Ramón)
If references are entirely missing, you can add them using this form.