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Economics and psychology.Perfect rationality versus bounded rationality

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  • Schilirò, Daniele

Abstract

Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

Suggested Citation

  • Schilirò, Daniele, 2011. "Economics and psychology.Perfect rationality versus bounded rationality," MPRA Paper 34292, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:34292
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    File URL: https://mpra.ub.uni-muenchen.de/34292/1/MPRA_paper_34292.pdf
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    References listed on IDEAS

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    3. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    4. Todd, Peter M. & Gigerenzer, Gerd, 2003. "Bounding rationality to the world," Journal of Economic Psychology, Elsevier, vol. 24(2), pages 143-165, April.
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    6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    7. Castellani, Marco & Di Giovinazzo, Viviana & Novarese, Marco, 2010. "Procedural rationality and happiness," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(3), pages 376-383, June.
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    9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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    13. Aldo Montesano, 2005. "La nozione di razionalità in economia," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 23-42.
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    1. EconPapers: Economics and psychology.Perfect rationality versus bounded rationality
      by inobrec in Knowledge Team on 2011-11-15 03:28:15

    More about this item

    Keywords

    Bounded rationality; procedural rationality; rational choice; cognitive economics;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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