Related papers: Money Pumps and Bounded Rationality
This paper studies whether rationality can be computed. Rationality is defined as the use of complete information, which is processed with a perfect biological or physical brain, in an optimized fashion. To compute rationality one needs to…
To study the assumption that the utility maximization hypothesis implicitly adds to consumer theory, we consider a mathematical representation of pre-marginal revolution consumer theory based on subjective exchange ratios. We introduce two…
Rationality is frequently associated with making the best possible decisions. It's widely acknowledged that humans, as rational beings, have limitations in their decision-making capabilities. Nevertheless, recent advancements in fields,…
As we show using the notion of equilibrium in the theory of infinite sequential games, bubbles and escalations are rational for economic and environmental agents, who believe in an infinite world. This goes against a vision of a self…
Rational decision making in its linguistic description means making logical decisions. In essence, a rational agent optimally processes all relevant information to achieve its goal. Rationality has two elements and these are the use of…
Rationality has been an intriguing topic for several decades. Even the scope of definition of rationality across different subjects varies. Several theories (e.g., game theory) initially evolved on the basis that agents (e.g., humans) are…
In the context of strategic games, we provide an axiomatic proof of the statement Common knowledge of rationality implies that the players will choose only strategies that survive the iterated elimination of strictly dominated strategies.…
Rationality is often related to optimal decision making. Humans are known to be bounded rational agents. However, recent advances in computing, and other scientific and technical fields along with large amount of data have led to a feeling…
The main result of this paper is a probabilistic proof of the penalty method for approximating the price of an American put in the Black-Scholes market. The method gives a parametrized family of partial differential equations, and by…
This paper revisits the classic instrument choice problem in a setting with consumption externalities, through the lens of robust mechanism design. A regulator can implement any incentive-compatible policy but is uncertain about how…
We relate the strategy sets that a player ends up with after refining his own strategies according to two very different models of rationality: namely, utility maximization and regret minimization.
A rational behavior of a consumer is analyzed when the user participates in a Peak Time Rebate (PTR) mechanism, which is a demand response (DR) incentive program based on a baseline. A multi-stage stochastic programming is proposed from the…
Standard economic theory assumes that agents in markets behave rationally. However, the observation of extremely large fluctuations in the price of financial assets that are not correlated to changes in their fundamental value, as well as…
A theoretical self-sustainable economic model is established based on the fundamental factors of production, consumption, reservation and reinvestment, where currency is set as a unconditional credit symbol serving as transaction equivalent…
We assume that an agent's rate of consumption is {\it ratcheted}; that is, it forms a non-decreasing process. Given the rate of consumption, we act as financial advisers and find the optimal investment strategy for the agent who wishes to…
The theory of rational choice assumes that when people make decisions they do so in order to maximize their utility. In order to achieve this goal they ought to use all the information available and consider all the choices available to…
We provide an elementary proof that revenue-maximizing mechanisms exist in multi-parameter settings whenever the distribution of valuations has finite expectation.
The state of economic theory and accumulated facts from the different branches of the economic science require to analyze the concept of the description of economy systems. The economic reality generates the problems the solution of that is…
We study the subtlety of optimal paternalism when a utilitarian planner has the power to design a discrete choice set for a heterogeneous population with bounded rationality. We first consider the planning problem in abstraction. We show…
We apply the maximum entropy principle to economic systems in equilibrium and find the density function for the market's wealth. This is the same as price density which is used for insurance pricing. The risk aversion parameter of the agent…