Modeling bounded rationality in economic theory: Four examples.

The terms bounded rationality and economic theory mean different things to different people. For me (see Rubinstein (2012)), economic theory is a collection of stories, usually expressed in formal language, about human interactions that involve joint and conflicting interests. Economic theory is not meant to provide predictions of the future. At most, it can clarify concepts and provide non-exclusive explanations of economic phenomena. In many respects, a model in economic theory is no different than a story. Both a story and a model are linked to reality in an associative manner. Both the storyteller and the economic theorist have in mind a real-life situation but do not consider the story or the model to be a full description of reality. Both leave it to the reader to draw their own conclusions, if any. For me, models of bounded rationality are models that include explicit references to procedural aspects of decision making. A common critique of bounded rationality models is that they are more specific, less general, and more arbitrary than models in the mainstream areas of economic theory, such as general equilibrium or game theory in which full rationality is assumed. In response, I would claim that every model makes very (very) special assumptions. Without strong assumptions, there would be no conclusions. It is true that rationality is a special assumption since it is viewed by many as being normative, whereas models of bounded rationality are viewed as dealing with deviations from normative behavior. Returning to the analogy of a story: What story is more interesting—one about normative people who behave “according to the book” or one about people who deviate from normative behavior? (PsycInfo Database Record (c) 2022 APA, all rights reserved)