Journal ArticleDOI
Incorporating Limited Rationality into Economics
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The potential for using neoclassical (broadly defined) optimization models to integrate insights from psychology on the limits to rationality into economics is discussed in this article. But, as discussed in this paper, the 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.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. ( JEL B49, D01, D03, D81, D84)read more
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Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications
TL;DR: The authors surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics and shows that even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes.
Journal ArticleDOI
Diagnostic Expectations and Credit Cycles
TL;DR: In this article, a model of credit cycles arising from diagnostic expectations is presented, in which agents over-estimate future outcomes that have become more likely in light of incoming data.
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Diagnostic Expectations and Credit Cycles
TL;DR: In this paper, a model of credit cycles arising from diagnostic expectations is presented, in which agents over-estimate future outcomes that have become more likely in light of incoming data.
ReportDOI
Errors in Probabilistic Reasoning and Judgment Biases
TL;DR: This article reviewed theory and evidence on this topic, with the goal of facilitating more systematic study of belief biases and their integration into economics, and drew general lessons for when people update too much or too little, reflecting on modeling challenges, and highlighting some possible directions for future work.
Journal ArticleDOI
Preference purification and the inner rational agent: a critique of the conventional wisdom of behavioural welfare economics
TL;DR: The authors argue that preference purification approach implicitly uses a dualistic model of the human being, in which an inner rational agent is trapped in an outer psychological shell, which is psychologically and philosophically problematic.
References
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Book ChapterDOI
Prospect theory: an analysis of decision under risk
Daniel Kahneman,Amos Tversky +1 more
TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Journal ArticleDOI
Prospect theory: analysis of decision under risk
Daniel Kahneman,Amos Tversky +1 more
Journal ArticleDOI
A Behavioral Model of Rational Choice
TL;DR: In this article, a model for the description of rational choice by organisms of limited computational ability is proposed, and the model is used to describe rational choice in organisms with limited computational abilities.
Journal ArticleDOI
Advances in prospect theory: cumulative representation of uncertainty
Amos Tversky,Daniel Kahneman +1 more
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Book
Human Problem Solving
TL;DR: The aim of the book is to advance the understanding of how humans think by putting forth a theory of human problem solving, along with a body of empirical evidence that permits assessment of the theory.