Less is more for Bayesians, too

Abstract

Starting from Simon’s bounded rationality notion, in this study we consider some of the links between concepts of bounded rationality and the approaches followed by economists in their analysis of the role played by economic agents’ expectations in driving the evolution of the economy through time. We argue that the degree of attention devoted to the formation of expectations by the macroeconomic theory has followed high and low cycles. In recent years, the increasing availability of survey data and the failings of models based on purely rational representative agents have prompted renewed interest in inquiries into the direct measurement of expectations and empirical studies of their formation. The intellectual legacy of Herbert Simon provides a useful guide for both these activities.