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Bounded rationality and perfect rationality: psychology into economics

  • Schilirò, Daniele

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 tries to highlight some well-known limits of the classical theory of rational choiceand compare this theory of choice with a different notion of rationality, bounded rationality, and with an approach that seeks to combine economics and psychology, based on experimental data, which established itself as cognitive or behavioral economics. The work also examines part of the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. A final reference is dedicated to neuroeconomics that is gaining more and more ground in the analysis of economic behavior.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41663.

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Date of creation: Sep 2012
Date of revision:
Handle: RePEc:pra:mprapa:41663
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  1. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  2. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
  4. Rabin, Matthew, 2002. "A perspective on psychology and economics," European Economic Review, Elsevier, vol. 46(4-5), pages 657-685, May.
  5. Ariel Rubinstein, 2005. "Modeling Bounded Rationality," Levine's Bibliography 784828000000000152, UCLA Department of Economics.
  6. Madalina CONSTANTINESCU, 2010. "Neuroeconomics and Decision Making Process," Theoretical and Practical Research in Economic Fields, ASERS Publishing, vol. 0(2), pages 210 - 218, December.
  7. repec:tpr:qjecon:v:116:y:2001:i:4:p:1233-1260 is not listed on IDEAS
  8. Schilirò, Daniele, 2012. "Bounded rationality: psychology, economics and the financial crisis," MPRA Paper 40280, University Library of Munich, Germany.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. repec:oup:qjecon:v:116:y:2001:i:4:p:1233-1260 is not listed on IDEAS
  11. Graziano, Mario & Schilirò, Daniele, 2012. "Rationality and choices in economics: behavioral and evolutionary approaches," MPRA Paper 35971, University Library of Munich, Germany.
  12. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  13. Schilirò, Daniele, 2005. "Economia della conoscenza,istituzioni e sviluppo economico
    [Knowledge-based economy, institutions and economic development]
    ," MPRA Paper 31492, University Library of Munich, Germany.
  14. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  15. 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 1325-48, December.
  16. 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.
  17. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
  18. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
  19. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
  20. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
  21. Novarese, Marco & Castellani, Marco & Di Giovinazzo, Viviana, 2009. "Procedural Rationality and Happiness," MPRA Paper 18290, University Library of Munich, Germany.
  22. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  23. 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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