Remarks on Bounded Rationality

The concept of bounded rationality is not well-defined. Several aspects of bounded rationality are discussed. Two different kinds of bounded rationality are distinguished. First, rationality may be bounded in the sense that the player cannot perform all the necessary calculations within the time frame of the game. This applies not only to numerical calculations but also to any kind of information processing, for example, figuring out logical consequences, or self-examination of preferences. Recent studies on the effect of bounded rationality concentrate on this type, studying the effect of limited computational capability on the set of Nash-equilibria of the game. Some objections to the approach taken in these papers in dealing with the question of bounded rationality are presented. In the second type, players may simply not accept that Nash-equilibrium is a necessary consequence of rationality. Such players challenge the Nash-equilibrium simply because it rules out some desirable outcomes. An example is presented followed by a proposed notion of approximate equilibrium (stronger than Radner’s) which offers some help in this direction. REMARKS ON BOUNDED RATIONALITY *