An informal argument shows that common knowledge of rationality implies the iterative elimination of strictly dominated strategies. Rationality here means that players do not play strategies that are strictly dominanted relative to their knowledge. We formalize and prove this claim. When by rationality we mean that players do not play strategies that are weakly dominanted relative to their know...

BOUNDED RATIONALITY: rationality as exhibited by decision makers of limited abilities. The ideal of RATIONAL DECISION MAKING formalized in RATIONAL CHOICE THEORY, UTILITY THEORY, and the FOUNDATIONS OF PROBABILITY requires choosing so as to maximize a measure of expected utility that reflects a complete and consistent preference order and probability measure over all possible contingencies. Thi...

The non-dictatorial asymmetric Nash bargaining solution is characterized on the basis of independence of irrelevant alternatives, independence of equivalent utility representations, and a new axiom—moderate collective rationality. The latter is logically weaker than Roth’s (1977) strong individual rationality and logically stronger than Anbarci and Sun’s (2011) weakest collective rationality.

In 1995, Aumann proved that in games of perfect information, common knowledge of rationality yields backward induction. In 1998, Stalnaker provided an example of a game in which common knowledge of rationality, once belief revision is taken into account, does not yield backward induction. However, in some pertinent situations in this example, players are allowed to forfeit the rationality condi...

We report the results of a simulation study in which we explore the joint effect of group absorptive capacity (as the average individual rationality of the group members) and cognitive distance (as the distance between the most rational group member and the rest of the group) on the emergence of collective rationality in groups. We start from empirical results reported in the literature on grou...

The analysis of dynamic games hinges on assumptions about players’ actions and beliefs at information sets that are not actually reached during game play, and that players themselves do not expect to reach. However, it is not obvious how to elicit intended actions and conditional beliefs at such information sets. Hence, key concepts such as sequential rationality, backward induction, and forwar...

The realization in the last century that observed human behavior often deviates from the predictions of traditional axiomatic theories of rationality (henceforth “TATs”), e.g. [6],[8], has led to a revival of the philosophical problem of developing a credible philosophical theory of rationality. In particular, the concept of ecological rationality (“ECO”) has been developed as a competitor to T...

This paper introduces heterogeneous expectations into a New Keynesian model. Our primary theoretical contribution is to provide an aggregation result for a model with nominal rigidities and heterogeneous bounded rationality. We incorporate bounded rationality at the individual agent level and determine restrictions on expectations operators sufficient to imply aggregate IS and AS relations of t...

Rationality is one of the most over-used words in economics. Behaviour can be rational, or irrational. So can decisions, preferences, beliefs, expectations, decision procedures, and knowledge. There may also be bounded rationality. And recent work in game theory has considered strategies and beliefs or expectations that are “rationalizable”. Here I propose to assess how economists use and mis-u...

Situational analysis (SA) is currently the method of mainstream microeconomics, and this paper maintains that it may also perform an important role in heterodox research programmes in economics. Its most elaborate version in economics, the ‘single-exit’ modelling approach, is an epistemologically driven endeavour which does not take full account of the way our world works. In this paper, it is ...