Bounded rationality at large

It is as if we knew what we were doing

January 13, 2012 — January 15, 2023

Figure 1

How can institutions construct good decisions out of the aggregate ignorance, laziness, short-sightedness, chaos and occasional information that we pump in to them?

A flagship question is about how the market does so, finding prices (maybe) efficiently despite the boundedly rational dynamics of human decisions. Are markets systems for fabricating rational-like behaviour from irrational agents? Hayek might argue this, and I think also Gode and Sunder of Zero Intelligence Agents fame. Friedman argued that in fact that markets effectively turn people into rational agents, which is stronger.

Are there useful measures of “how much rationality” humans have that we can use for aggregate modelling? (as opp. the minute and detailed ones that Kahnemann and Tversky devise, that are hard to scale up.)


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