Incorporating Limited Rationality into Economics
Journal of Economic Literature
vol. 51,
no. 2, June 2013
(pp. 528-43)
Abstract
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.Citation
Rabin, Matthew. 2013. "Incorporating Limited Rationality into Economics." Journal of Economic Literature, 51 (2): 528-43. DOI: 10.1257/jel.51.2.528Additional Materials
JEL Classification
- B49 Economic Methodology: Other
- D01 Microeconomic Behavior: Underlying Principles
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D84 Expectations; Speculations