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...

In diverse fields such as computer science, economics and psychology, bounded rationality has emerged as an important research topic. Models which assume the existence of perfectly rational agents seem inadequate for many realworld problems where agents often lack perfect rationality. Classes of imperfect rationality include the conditions of incomplete knowledge, memory, information or computa...

In his dissertation of 1950, Nash based his concept of solution to a game on the principles that “a rational prediction should be unique, that the players should be able to deduce and make use of it.” In this paper, we address the issue of when such definitive solutions are possible. We assume player rationality at least as strong as Aumann’s rationality. By formalizing Nash’s reasoning, we sho...

This paper examines different approaches to rationality in analytic philosophy and AI, in the light of Bermúdez’s proposal that a full account of rationality must aim to explain how agents can both select and explain actions, as well as assessing them against some normative standard. We briefly survey instrumental, linguistic and discursive accounts of rationality, and conjecture that Habermas’...

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...

Modern theory of rationality has become large and rich. The search for the most general principles is driven forward as much as the countless specializations in countless branches. Often, the questions lie far apart. The methods to answer them are often disparate and none of the questions is exhausted. The theory of rationality has truly grown into a science of its own. Many details have become...

Bounded rationality has often been invoked in the theory of economic organization, mainly to rationalize contractual incompleteness. I argue that one may distinguish between " thin " and " thick " notions of bounded rationality; that models that rely on thin notions are often effectively indistinguishable from models that rely on full rationality; and that the value-added in terms of economic c...