Volume 4 • Issue 1 | March 2020

Predictably (Boundedly) Rational: Examples of Seemingly Irrational Behavior can be Quantitatively Explained by Bounded Rationality

Laxman Bokati, Olga Kosheleva, and Vladik Kreinovich

Abstract: Traditional economics is based on the simplifying assumption that people behave perfectly rationally, that before making any decision, a person thoroughly analyzes all possible situations. In reality, we often do not have enough time to thoroughly analyze all the available information, as a result of which we make decisions of bounded rationality bounded by our inability to perform a thorough analysis of the situation. So, to predict human behavior, it is desirable to study how people actually make decisions. The corresponding area of economics is known as behavioral economics. It is known that many examples of seemingly irrational behavior can be explained, on the qualitative level, by this idea of bounded rationality. In this paper, we show that in many cases, this qualitative explanation can be expanded into a quantitative one, that enables us to explain the numerical characteristics of the corresponding behavior.

JEL classification: C18, D9
MSC2020 classification: 62P20, 62P25, 91B42, 91B80, 91B06, 91B10, 91B16, 91A30, 91C99