Towards A Theory of Limited Rationality: Some Remarks on the Symposium'S Impact on Economic Theory

Abstract

Publisher Summary This chapter focuses on the necessity of a theory of limited rationality. The prevailing picture of rational man in present day economic theory is that of a Bayesian decision maker with unlimited cognitive capabilities. Economists admit that this is an idealization that does not completely correspond to the facts. The defenders of Bayesianism as a descriptive theory argue that the deviations from reality are relatively unimportant. Moreover, they maintain that even if individual behavior is far away from Bayesian rationality, average behavior may still be correctly described, because deviations in opposite directions can be expected to cancel out. It is necessary to develop a theory of limited rationality that can replace the principle of subjectively expected utility maximization as a tool of economic model building. A useful theory of limited rationality should be nearer to psychological reality, but it may still be a much idealized picture of empirical phenomena. It should be simple enough to be incorporated into quantitative economic models amenable to analytical treatment.