The Anatomy of Errors in Decision-Making by Rationally Behaving Agents from the Perspective of the Theory of Bounded Rationality: Extension for Contextual Games
17 Pages Posted: 3 Nov 2012 Last revised: 29 Jan 2014
Date Written: November 2, 2012
How can errors in decision-making by rationally behaving individuals be explained? The concepts of bounded rationality proposed by H. Simon and of imperfect information in the complex reality by F. Hayek attack the over-restrictive assumption of perfectly informed individuals or organisms in neoclassical microeconomics. Since this assumption excludes erroneous decision-making, some results must be explained by questioning the rationality assumption. In this paper, we show that erroneous decision-making by individuals and organisms is not necessarily erroneous if we look at the contextual games that individuals and organisms play in a complex reality. This helps to explain errors in the decision-making of individuals or organisms, while maintaining the assumption of rational behavior. At the same time, we show that the errors observed in the contextual analysis of games in decision-making by individuals or organisms can only be apparent.
Keywords: Bounded rationality, complex systems, contextual games, erroneous behavior, rational decision-making
JEL Classification: D01, C73
Suggested Citation: Suggested Citation