New Economics Papers
on Neuroeconomics
Issue of 2011‒11‒01
two papers chosen by

  1. Economics and psychology.Perfect rationality versus bounded rationality By Schilirò , Daniele
  2. On the Evolutionary Stability of Rational Expectations By William R. Parke; George A. Waters

  1. By: Schilirò , Daniele
    Abstract: Classical 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 does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.
    Keywords: Bounded rationality; procedural rationality; rational choice; cognitive economics
    JEL: D81 B52 C00 D83
    Date: 2011–10
  2. By: William R. Parke (Department of Economics, University of North Carolina); George A. Waters (Department of Economics, Illinois State University)
    Abstract: Evolutionary game theory provides a fresh perspective on the prospects that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions where agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents’ attention.
    Keywords: rational expectations, hetergeneous expectations, evolutionary game theory, asset pricing, efficient markets hypothesis
    JEL: C73 D84 G12 C22
    Date: 2011–10

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