Bounded Rationality and Social Concerns in Decision Processes: Theory, Experiments, and Applications
Individual decision-making is the basic building block for studying complex environments, such as markets, political systems, and social dynamics. The maintained theory of individual decision-making is embodied by the neoclassical rational agent, whose only concern is the maximization of utility of his material consumption. Two qualities of this agent are especially important for the research we will undertake: He has perfect understanding of the problems he faces - today and in the future - and unbounded computational ability to solve them. He also has no regard for the consumption of other members of the society or for their feelings about his actions. However, sizable empirical and experimental evidence shows that departure from these qualities is robust and significant. Such failure to incorporate bounded rationality and social concerns has proven critical in diminishing the maintained theory’s predictive power in socially relevant and complex situations, such as lifetime consumption and saving, taxation and expenditure policy, labour search and wage determination.
The objective of this project is to bring these phenomena into the description of individual decision processes, to test their implications, and to develop some important applications. A novel and central feature of our approach is the attempt to retain the parsimonious methodological approach of economic modelling, which has scored groundbreaking successes in matters as diverse as the design of auctions, markets, contracts, and voting mechanisms. Our project envisions the development of theory on individual decision-making, the use of experiments to illuminate and test the theory, and the concrete application of theory - mainly to financial markets. The project will significantly contribute to enhancing our understanding of the above-mentioned socially relevant situations. The explanatory power of our approach will be guaranteed by the continuous feedback between theory and evidence – experimental and neuro-experimental, and by an emphasis on wide-scope, as opposed to ad hoc, modelling.
IGIER - Università Bocconi