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Universidad de Granada. Departamento de Teoría e Historia Económica
Bounded rationalityBehaviorSchelling's segregation modelInformation
Ballester, C.; Hernández, P. Bounded rationality. Universidad de Granada. Departamento de Teoría e Historia Económica (2010). (The Papers; 10/10). [http://hdl.handle.net/10481/31567]
The observation of the actual behavior by economic decision makers in the lab and in the field justifies that bounded rationality has been a generally accepted assumption in many socio-economic models. The goal of this paper is to illustrate the difficulties involved in providing a correct definition of what a rational (or irrational) agent is. In this paper we describe two frameworks that employ different approaches for analyzing bounded rationality. The first is a spatial segregation set-up that encompasses two optimization methodologies: backward induction and forward induction. The main result is that, even under the same state of knowledge, rational and non-rational agents may match their actions. The second framework elaborates on the relationship between irrationality and informational restrictions. We use the beauty contest (Nagel, 1995) as a device to explain this relationship.