Incorporating Limited Rationality into Economics
Rabin, Matthew. 2013. "Incorporating Limited Rationality into Economics."
Journal of Economic Literature,
Harstad and Selten (this forum) raise interesting questions about the relative promise of
optimization models and bounded-rationality models in making progress in economics.
This article builds from their analysis by indicating the potential for using neoclassical
(broadly defined) optimization models to integrate insights from psychology on the
limits to rationality into economics. I lay out an approach to making (imperfect and
incremental) improvements over previous economic theory by incorporating greater
realism while attempting to maintain the breadth of application, the precision of
predictions, and the insights of neoclassical theory. I then discuss how many human
limits to full rationality are, in fact, well understood in terms of optimization.
Article Full-Text Access
Rabin, Matthew (U CA, Berkeley)
B49: Economic Methodology: Other
D01: Microeconomic Behavior: Underlying Principles
D03: Behavioral Economics: Underlying Principles
D81: Criteria for Decision-Making under Risk and Uncertainty
D84: Expectations; Speculations