Model Of Bounded Rationality Research Articles

Risk-averse energy dispatch for hybrid energy refueling stations considering Boundedly rational mixed user equilibrium and operational uncertainties

Nowadays, charging stations, hydrogen refueling stations, and natural gas refueling stations are being integrated into hybrid energy refueling stations (HERSs) to save investment costs and offer diverse refueling services altogether. This research proposes a risk-averse energy dispatch strategy for HERSs, incorporating bounded user rationality and operational uncertainties. A boundedly rational mixed user equilibrium model is proposed to capture the mobility of heterogeneous traffic flow, including electric vehicles (EVs), hydrogen fuel cell vehicles (HFCVs), and natural gas vehicles (NGVs), each with distinct refueling demands characterized by bounded decision-making rationality. A grid-connected HERS model integrated with carbon capture and storage and on-site renewable energy sources is designed to provide sustainable refueling services to EVs, HFCVs, and NGVs. Furthermore, an HERS operator aggregates multiple HERSs to participate in the day-ahead and real-time electricity markets. The optimal equipment operation and energy bidding strategies for the HERS operator are solved using a risk-averse approach based on conditional value-at-risk, addressing operational uncertainties from heterogeneous refueling demand, electricity markets, and renewable generation. Numerical results have validated the effectiveness of the proposed method in promoting net-zero emissions, securing economic benefits, and mitigating risks associated with operational uncertainties.

Well-Posedness for Mean Field Games with Finite State and Action Space

The main purpose of this paper is to investigate the well-posedness for mean field game with finite state and action space (FSASMFG) by using nonlinear analysis methods. First, we set up the bounded rationality model of the FSASMFG in the topological space. Next, we study some sufficient conditions of generalized strong well-posedness (GS-wp) and strong well-posedness (S-wp) for a class of FSASMFGs. Finally, we give some characterizations of GS-wp and S-wp for FSASMFGs with the help of set-valued analysis methods. These new results presented in the paper develop and improve the corresponding conclusions in the recent literature.

A behavioral hybrid New Keynesian model: Quantifying the importance of belief formation frictions

Recent evidence points towards significant belief formation frictions and forecast sluggishness. In this paper, we build a bounded rationality New Keynesian model, estimated to match the degree of forecast sluggishness present in the data. We find that bounded rationality induces enough myopia and intrinsic persistence, diminishing the influence of consumption habits and price indexation. Additionally, the bounded rationality model generates impulse response dynamics to monetary policy shocks that resemble those observed in empirical estimations. This study highlights the significance of bounded rationality in capturing real-world dynamics and provides valuable insights into the role of belief formation frictions in macroeconomic modeling.

Bounded rationality of prosecutorial decision-making in corporate fraud violations

Purpose This study aims to analyze corporate mail and wire fraud penalties, using bounded rationality in decision-making and assessing internal and external influences on prosecutorial choices. Design/methodology/approach The study analyzed 467 cases from 1992 to 2019, using data from the Corporate Prosecution Registry of the University of Virginia School of Law and Duke University School of Law. It examined corporations facing mail and wire fraud charges and other fraud crimes. Multiple regression linked predictor variables to the dependent variable, total payment. Findings The study found that corporate penalties tend to be lower for financial institutions or corporations in countries with US free trade agreements. Conversely, penalties are higher when the company is a U.S. public company or filed in districts with more pending criminal cases. Originality/value This study’s originality lies in applying the bounded rationality model to assess corporate prosecutorial decisions, unveiling external factors’ influence on corporate penalties.

Judgment under radical uncertainty: Epistemic rational heuristics

AbstractThe special issue “Expanding the boundaries of rationality: Towards new models of decision making for radical uncertainty” addresses the challenge of developing logically sound models of decision making for conditions of uncertainty evading those manageable by established decision making approaches. This editorial characterizes the sought new models and approach as constructivist in nature but neither deductive nor Bayesian in logic: a set of epistemic rationality models for discovering new problems and solutions (“found” either in the real or the artificial world, i.e., either detected or designed) that extend the available bounded rationality models. This editorial offers a map of this territory, positioning the new heuristics identified in this collection of articles in a more general picture of heuristic methods qualifyable as fit to radical uncertainty.

Context-sensitive rationality: Choice by salience

We describe a context-sensitive approach to individual choice, in which the explanation is provided by a family of linear orders indexed by all available items. Selection from a menu is then recovered by the classical maximization paradigm, subject to the constraint that the justifying rationale must be indexed by an item of the menu. This approach allows us to pursue two complementary goals: (1) a fine classification of all possible choices into classes of rationality, and (2) a bounded rationality model based on an ordinal notion of salience. Concerning (1), we refine the context-free model of rationalization by multiple rationales, partitioning the class of all choice functions on n items into n classes of rationality. The least rational class is expressive of a moody behavior, which is rare for small n, but prevailing for large n. Concerning (2), we enrich our framework by a binary relation of salience, which guides the selection process. Upon requiring that all rationales associated to equally salient items coincide, choice is explained by appealing to the unique linear order indexed by a maximally salient item of the menu. Choice by salience is a specification of choice with limited attention. Numerical estimates show the sharp selectivity of this model of bounded rationality.

Decision making Practices on the Implementation of Curriculum in Community-Based Secondary Schools in Tabora Region, Tanzania

The main purpose of this study was to examine the opinions of educational stakeholders concerning the practices of decision-making on the curriculum implementation in community-based secondary schools in Tabora region in Tanzania. Thirty interviewees took part in the study. A qualitative research methodology was used in the investigation. Purposive sampling was utilised as a method of sampling. Thematic data analysis was used to analyse the data after they had been acquired using a semi-structured interviewing method. Findings found out that most community-based secondary schools used decision-making techniques that did not conform to every step and procedures that needed to be followed in order to make rational decisions about teaching, learning, and evaluation in schools. The findings thus corroborated the main argument of the bounded rationality model of decision-making, which assert that whenever a leader engages in decision-making without adhering to proper procedures starting with problem identification and ending with review and evaluation, the decisions made frequently fail to address the real problems that exist in an organization. Finally, the study makes the following recommendations for Tanzania's local authorities who are in charge of overseeing the community-based secondary schools: ensure that heads of schools regularly participate in training on school pedagogical leadership; ensure that there is effective monitoring and evaluation of how heads of schools make daily decisions regarding teaching and learning; and ensure that there are effective mentorship programmes in place.

Bounded rational expectation: How it can affect the effectiveness of monetary rules in the open economy

Since the channel for agents’ expectations matters for the effectiveness of monetary policies, it is crucial for policy-makers to assess the degree to which economic agents are boundedly rational and understand how the bounded rationality affects the monetary rules in stabilising the economy. We investigate the empirical evidence for the bounded rationality in a small open economy model of the UK, and compare the results with those for the conventional rational expectations model. Overall, comparing the estimated models favours the bounded rationality framework. The results show that bounded rationality model helps to explain the hump-shaped dynamics of real exchange rate following monetary shocks, while the rational expectations model cannot. Also, we find that the exchange rate channel in the bounded rationality enlarges the effects of foreign mark-up shock, policymakers should send stronger signals over its target to the economics agents to combat the inflation. So the bounded rationality that can be found in the data still leaves scope for the forward guidance channel to work strongly enough to be exploited by policymakers.

Boundedly rational bidding decision for land auctions during the transformation of real estate markets

Real estate developers in China exhibit different boundedly rational behaviors when bidding in different land auction formats, resulting in deviation from fully rational bidding, and the transformation of China’s real estate industry has intensified this deviation. To address this problem, this study establishes a reference utility model and a subjective decision probability model under the framework of incomplete information game to characterize developers’ utility distortion and winning probability distortion in open-bid auctions and sealed-bid auctions for land, respectively. The results show that the deviation between bounded rational bidding and fully rational bidding increases as developer competition intensifies. The equilibrium bidding of cost-disadvantaged developers in the boundedly rational model deviates less from the standard model. Moreover, in sealed-bid auctions, the "hiding degree" of cost-advantaged developers is greater, showing size effects, while the bids in open-bid auctions are more complex and affected by market conditions and developers’ risk preferences. Thus, this study characterizes boundedly rational bidding in land auctions and interprets the deviation from fully rational bidding, which can provide a more real basis for land auction mechanism design.

Earning While Learning: An Adversarial Multi-Armed Bandit Based Real-Time Bidding Scheme in Deregulated Electricity Market

As the specific incarnation of cyber-physical-social systems, in deregulated electricity market, the market gaming behaviors may have significantly affected the costs of electricity delivered to the market. Especially, from the supply side, the primary goal of power generating companies (PGCs) is to develop strategic biddings to maximize their profits in long-term trading, when facing intrinsic uncertainty. Typically, in such repeated and dynamic settings, one fundamental challenge is that, any PGC neither has prior knowledge about all unknown opponents’ incentives, nor observes their strategies and obtained profits. Especially, the common setting is that, once the bidding auction has occurred, the PGC only observes the market clearing price (MCP) at each round, and winning or losing status. While it is typical to assume some perfect or bounded rationality model of the PGCs, their real behaviors do not follow such assumptions due to lack of complete information, computational intractability, or lack of perfect execution, etc. We formulate the problem of sequentially optimizing any PGC's bids with an adversarial multi-armed bandit (MAB) model. Specifically, at each round, a PGC chooses to play against all other opponents from an infinite set of possible strategies that are split into continuous intervals by sequentially occurred MCPs. Then at the end of each round, the PGC observes the outcome of the auction and updates its estimation on the expected bid's fitness for each interval (i.e., how much the expected profit of the interval could be achieved), and selects the bid for the next round using the proposed algorithm Exp3C (i.e., exponential-weight for exploration and exploitation with continuous value). The experimental results based on real dataset demonstrate that Exp3C performs better than other heuristic schemes including pure greedy, <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">${\boldsymbol{\varepsilon}}$</tex-math></inline-formula> -greedy and MCP predication based bidding schemes. Moreover, we theoretically prove the upper bound of average Exp3C regret per round follows <inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">${\boldsymbol{O}} ({2/\sqrt {\boldsymbol{T}} })$</tex-math></inline-formula> , where <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">T</i> is the number of total rounds. In summary, the proposed Exp3C has two distinguished advantages. First it is distributed, since its decisions uniquely depend on its past decisions and profits. Second, it is rational, since a PGC is given guarantees on its own accumulated profit regardless of other PGCs’ behaviors.

Bounded rational decision-making models suggest capacity-limited concurrent motor planning in human posterior parietal and frontal cortex.

While traditional theories of sensorimotor processing have often assumed a serial decision-making pipeline, more recent approaches have suggested that multiple actions may be planned concurrently and vie for execution. Evidence for the latter almost exclusively stems from electrophysiological studies in posterior parietal and premotor cortex of monkeys. Here we study concurrent prospective motor planning in humans by recording functional magnetic resonance imaging (fMRI) during a delayed response task engaging movement sequences towards multiple potential targets. We find that also in human posterior parietal and premotor cortex delay activity modulates both with sequence complexity and the number of potential targets. We tested the hypothesis that this modulation is best explained by concurrent prospective planning as opposed to the mere maintenance of potential targets in memory. We devise a bounded rationality model with information constraints that optimally assigns information resources for planning and memory for this task and determine predicted information profiles according to the two hypotheses. When regressing delay activity on these model predictions, we find that the concurrent prospective planning strategy provides a significantly better explanation of the fMRI-signal modulations. Moreover, we find that concurrent prospective planning is more costly and thus limited for most subjects, as expressed by the best fitting information capacities. We conclude that bounded rational decision-making models allow relating both behavior and neural representations to utilitarian task descriptions based on bounded optimal information-processing assumptions.

From Bayes-optimal to heuristic decision-making in a two-alternative forced choice task with an information-theoretic bounded rationality model.

Bayes optimal and heuristic decision-making schemes are often considered fundamentally opposed to each other as a framework for studying human choice behavior, although recently it has been proposed that bounded rationality may provide a natural bridge between the two when varying information-processing resources. Here, we investigate a two-alternative forced choice task with varying time constraints, where subjects have to assign multi-component symbolic patterns to one of two stimulus classes. As expected, we find that subjects' response behavior becomes more imprecise with more time pressure. However, we also see that their response behavior changes qualitatively. By regressing subjects' decision weights, we find that decisions allowing for plenty of decision time rely on weighing multiple stimulus features, whereas decisions under high time pressure are made mostly based on a single feature. While the first response pattern is in line with a Bayes-optimal decision strategy, the latter could be considered as an instantiation of heuristic decision-making with cue discounting. When fitting a bounded rational decision model with multiple feature channels and varying information-processing capacity to subjects' responses, we find that the model is able to capture subjects' behavioral change. The model successfully reflects the simplicity of heuristics as well as the efficiency of optimal decision making, thus acting as a bridge between the two approaches.

The Focal Luce Model

We introduce the Focal Luce Model (FLM), a random choice model that generalizes Luce’s (1959) model (multinomial logit) to account for menu-dependent focality of alternatives. In the FLM, focal alternatives are relatively more likely to be chosen even after taking utilities into account. The FLM captures a variety of bounded rationality models while behaviorally distinguishing between what is focal and the magnitude of the bias from focality. We show how to identify utilities, focal sets, and bias terms from choice frequencies; behaviorally characterize the FLM by weakening Luce’s (1959) independence from irrelevant alternatives; and apply our model to choice data and games. (JEL C70, D11, D91)

Economic Agents as Imperfect Problem Solvers

Abstract We develop a novel bounded rationality model of imperfect reasoning as the interaction between automatic (System 1) and analytical (System 2) thinking. In doing so, we formalize the empirical consensus of cognitive psychology using a structural, constrained-optimal economic framework of mental information acquisition about the unknown optimal policy function. A key result is that agents reason less (more) when facing usual (unusual) states of the world, producing state- and history-dependent behavior. Our application is an otherwise standard incomplete-markets model with no a priori behavioral biases. The ergodic distribution of actions and beliefs is characterized by endogenous learning traps, where locally stable state dynamics generate familiar regions of the state space within which behavior appears to follow memory-based heuristics. This results in endogenous behavioral biases that have many empirically desirable properties: the marginal propensity to consume is high even for unconstrained agents, hand-to-mouth status is more frequent and persistent, and there is more wealth inequality than in the standard model.

Iran’s Look to the East Policy in the Framework of Bounded Rationality Model

Doğu’ya Bakış politikası; İran’ın, Batı ile yüzleşmek için Doğu ülkeleriyle ilişkilerini güçlendirmesini hedefleyen bir dış politika vizyonudur. İlk kez Cumhurbaşkanı Mahmud Ahmedinejad Dönemi’nde İran’ın maruz kaldığı yaptırım ve izolasyonu kırmak amacıyla uygulanmaya başlanmıştır. Ancak Hasan Ruhani’nin 2013 yılında cumhurbaşkanlığı görevine gelmesiyle birlikte izlediği Batı ile yapıcı angajman politikası kapsamında Doğu’ya Bakış politikasının Batı’yı dengeleme yönü ön plana çıkmıştır. ABD Başkanı Donald Trump’ın Mayıs 2018’de Kapsamlı Ortak Eylem Planı’ndan (KOEP, Nükleer Anlaşma) çekilerek İran’a karşı sert yaptırımlar uygulamasına istinaden İran dış politikasının yönü bir kez daha Doğu’ya dönmüştür. İran’da daha çok muhafazakâr cephe tarafından desteklenen Doğu’ya Bakış politikasının, İbrahim Reisi’nin Cumhurbaşkanı olmasıyla birlikte yeniden İran dış politikasında öne çıktığı görülmüştür. Ancak Reisi hükûmetinin uyguladığı şekliyle Doğu’ya Bakış politikası, çeşitli kısıtlama ve çıkmazlarla karşı karşıyadır. Bu makalenin amacı, söz konusu politikayı dış politika analizi modelleri arasında yeri olan sınırlı rasyonellik modeli perspektifinden değerlendirmek ve bu politikanın esasen mutlak bir rasyonel tercih olmadığını, dış politika karar alıcılarının sınırlı alternatifler arasından en uygun olanını seçmesiyle oluşan zorunlu ve kısıtlı bir tercih olduğunu ortaya koymaktır.

A Boundedly Rational Decision-Making Model Based on Weakly Consistent Preference Relations

Completeness is one of the basic assumptions about the rational preference relation in classical decision theory. Strongly and weakly consistent preferences are presented by abandoning the completeness of the rational preference relation. Some expansion and contraction conditions are proposed and the relationships between these conditions of rationality are discussed. The relationships between the conditions of rationality and boundedly rational choice behavior based on strongly and weakly consistent preferences are analyzed and discussed. Furthermore, an example about the choices of chocolates with interval ordinal numbers is given to explain some of the main conclusions in this paper. The results can be used as references for the study of boundedly rational decisions.

Questioning boundedly rational frameworks in practice: The case of women entrepreneurs in Kumasi, Ghana

Management research has a foundation in bounded rationality, wherein individuals seek to make the best choice to satisfy preferences within limits posed by informational incompleteness. This work addresses how the notion of rationality that models Western, male centric business concerns is not universal. Gender has been left out of the assumptions of boundedly rational models and the use of these models often advantage men at the expense of women. The work in this paper explores the absence of gender in the assumptions of bounded rationality and how this theory is applied in emerging contexts. The paper explores the structural obstacles based on bounded rationality that are imposed on women's businesses and their decision-making and how these obstacles constrain the potential of female entrepreneurs. The paper examines these issues through 220 interviews with stakeholders in the Kumasi Central Market social system in Kumasi, Ghana. The evidence shows that when considering business registration, what is most salient to entrepreneurs is the prevailing cultural expectations for men and women, despite female economic and social prowess as entrepreneurs that predated this business registration laws by centuries. This tension between expectations for female entrepreneurial competency and the simultaneous marginalization of female entrepreneurs using frameworks based on bounded rationality is explored.

Information Redundancy Neglect versus Overconfidence: A Social Learning Experiment

We study social learning in a continuous action space experiment. Subjects, acting in sequence, state their beliefs about the value of a good after observing their predecessors’ statements and a private signal. We compare the behavior in the laboratory with the Perfect Bayesian Equilibrium prediction and the predictions of bounded rationality models of decision-making: the redundancy of information neglect model and the overconfidence model. The results of our experiment are in line with the predictions of the overconfidence model and at odds with the others’. (JEL C91, D12, D82, D83)

Hardness of Learning in Rich Environments and Some Consequences for Financial Markets

This paper examines the computational feasibility of the standard model of learning in economic theory. It is shown that the information update technique at the heart of this model is impossible to compute in all but the simplest scenarios. Specifically, using tools from theoretical machine learning, the paper first demonstrates that there is no polynomial implementation of the model unless the independence structure of variables in the data is publicly known. Next, it is shown that there cannot exist a polynomial algorithm to infer the independence structure; consequently, the overall learning problem does not have a polynomial implementation. Using the learning model when it is computationally infeasible carries risks, and some of these are explored in the latter part of the paper in the context of financial markets. Especially in rich, high-frequency environments, it implies discarding a lot of useful information, and this can lead to paradoxical outcomes in interactive game-theoretic situations. This is illustrated in a trading example where market prices can never reflect an informed trader’s information, no matter how many rounds of trade. The paper provides new theoretical motivation for the use of bounded rationality models in the study of financial asset pricing—the bound on rationality arising from the computational hardness in learning.

Stability of equilibria for population games with uncertain parameters under bounded rationality

Under the assumption that the range of varying uncertain parameters is known, some results of existence and stability of equilibria for population games with uncertain parameters are investigated in this paper. On the basis of NS equilibria in classical noncooperative games, the concept of NS equilibria for population games with uncertain parameters is defined. Using some hypotheses about the continuity and convexity of payoff functions, the existence of NS equilibria in population games is also proved by Fan–Glicksberg fixed point theorem. Furthermore, we establish a bounded rationality model of population games with uncertain parameters, and draw the conclusions about the stability of NS equilibrium in this model by constructing the rationality function and studying its properties.