Related papers: Money Pumps and Bounded Rationality
The notion of bounded rationality originated from the insight that perfectly rational behavior cannot be realized by agents with limited cognitive or computational resources. Research on bounded rationality, mainly initiated by Herbert…
We take another look at the general problem of selecting a preferred probability measure among those that comply with some given constraints. The dominant role that entropy maximization has obtained in this context is questioned by arguing…
This paper argues that the fundamental principle of contemporary financial economics is balanced reciprocity, not the principle of utility maximisation that is important in economics more generally. The argument is developed by analysing…
We show how (resource) bounded rationality can be understood as the interplay of two fundamental moral principles: deontology and utilitarianism. In particular, we interpret deontology as a regularisation function in an optimal control…
We consider a problem of optimal investment with intermediate consumption and random endowment in an incomplete semimartingale model of a financial market. We establish the key assertions of the utility maximization theory assuming that…
The concept of rationality is central to the field of artificial intelligence (AI). Whether we are seeking to simulate human reasoning, or trying to achieve bounded optimality, our goal is generally to make artificial agents as rational as…
An axiomatic approach to macroeconomics based on the mathematical structure of thermodynamics is presented. It deduces relations between aggregate properties of an economy, concerning quantities and flows of goods and money, prices and the…
In a satisficing equilibrium each agent $i$ plays one of her top $k_i$ actions in response to the actions of the other agents. Our concept unifies models of bounded rationality and yields predictions that differ from canonical solution…
This paper studies the problem of optimal investment in incomplete markets, robust with respect to stopping times. We work on a Brownian motion framework and the stopping times are adapted to the Brownian filtration. Robustness can only be…
The principle that rational agents should maximize expected utility or choiceworthiness is intuitively plausible in many ordinary cases of decision-making under uncertainty. But it is less plausible in cases of extreme, low-probability risk…
Conversational implicatures are usually described as being licensed by the disobeying or flouting of a Principle of Cooperation. However, the specification of this principle has proved computationally elusive. In this paper we suggest that…
A logic is defined that allows to express information about statistical probabilities and about degrees of belief in specific propositions. By interpreting the two types of probabilities in one common probability space, the semantics given…
We develop a model to study the role of rationality in economics and biology. The model's agents differ continuously in their ability to make rational choices. The agents' objective is to ensure their individual survival over time or,…
The expected utility hypothesis is a popular concept in economics that is useful for making decisions when the payoff is uncertain. In this paper, we investigate the implications of a fluctuation theorem in the theory of expected utility.…
Stability of the utility maximization problem with random endowment and indifference prices is studied for a sequence of financial markets in an incomplete Brownian setting. Our novelty lies in the nonequivalence of markets, in which the…
We provide sufficient conditions under which a utility function may be recovered from a finite choice experiment. Identification, as is commonly understood in decision theory, is not enough. We provide a general recoverability result that…
We consider the problem of maximizing expected utility from terminal wealth in models with stochastic factors. Using martingale methods and a conditioning argument, we determine the optimal strategy for power utility under the assumption…
Assuming that agents' preferences satisfy first-order stochastic dominance, we show how the Expected Utility paradigm can rationalize all optimal investment choices: the optimal investment strategy in any behavioral law-invariant…
In the study by Chen et al. (2023) [01], the large language model GPT demonstrated economic rationality comparable to or exceeding the average human level in tasks such as budget allocation and risk preference. Building on this finding,…
The effectiveness of utility-maximization techniques for portfolio management relies on our ability to estimate correctly the parameters of the dynamics of the underlying financial assets. In the setting of complete or incomplete financial…