March 1 - August 31, 2012
Elchanan Ben-Porath (The Hebrew University)
The classical model in economic theory assumes that the economic agent is fully rational. In particular, it is assumed that the agent is aware of the set of actions that is available to him and has a correct model of the environment in which he is operating. In particular, he understands the relationship between his actions and outcomes. Any calculation or consideration that is relevant to achieve this complete understanding of the environment can be done without mistake, with no delay, and without cost. In addition, the agent has a complete and consistent preference over the set of possible outcomes and chooses the action that leads to the best outcome with respect to his preference.
This model is clearly unrealistic. A human agent is often unaware of actions, contingencies, and considerations that are relevant for the decision problem that he is facing. He often finds it difficult to form a preference (for example, to determine his trade-off between price and quality, or the trade-off between current pleasure and future welfare), and there are specific limits on his ability to process information (specifically, attention, memory, and thinking are bounded and costly). Economists have of course realized that people are subject to these limitations; however, until they were exposed to the research in cognitive psychology they did not have a concrete sense of the systematic deviations of human decision making from the rational model.
The research agenda of our group consists of two main components:
(1) Studying models of decision making that depart from the standard model and in particular take into account cognitive limitations and non-standard preferences.
(2) Studying the implications of bounded rationality in multi-person interactions, in particular, games and market economics.