Bounded rationality and perfect rationality: psychology into economics

Schilirò, Daniele (2012): Bounded rationality and perfect rationality: psychology into economics.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bounded rationality; procedural rationality; rational choice; behavioral economics; neuroeconomics
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B52 - Institutional ; Evolutionary; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D87 - Neuroeconomics

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