Bounded Rationality as a Source of Loss Aversion and Optimism: A Study of Psychological Adaptation Under Incomplete Information

AbstractMainstream economists are reluctant to integrate features of bounded rationality into their behavioural assumptions. However, particularly in the field of economic policy the scope for limited rationality is given, since voters lack incentives for rational reasoning concerning their voting decision. The explanatory power of limited rationality is demonstrated for the example of reform resistance. Status quo preferences, endowment effects and loss aversion are typical deviations from full rationality and explain resistance against beneficial reforms even if there is full information and no uncertainty. From this psychological perspective, a major precondition for the implementation of reforms is the loss of status quo as an available option. Test runs of policy options may also be helpful for overcoming psychological reform resistance.

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Behaviour in Context

10.1093/oxfordhb/9780198755609.013.10 ◽

2018 ◽

Cited By ~ 2

Author(s):

Gordon L. Clark

Keyword(s):

Collective Action ◽

Adverse Effects ◽

Bounded Rationality ◽

Diffusion Of Innovation ◽

Economic Geography ◽

Loss Aversion ◽

Home Bias ◽

Rational Agent ◽

Microeconomic Theory ◽

Common Problems

The behavioural revolution has profoundly affected how we conceptualize behaviour. The rational agent of standard microeconomic theory has been found wanting and, in its place, new formulations have been presented which take seriously human traits like myopia and loss aversion. Here it is argued that the behavioural revolution offers a way of understanding common problems in economic geography, such as co-location, clusters of innovation, the diffusion of innovation, and home bias. It is noted that earlier versions of behaviouralism stressed bounded rationality but underestimated the far-reaching consequences of the behavioural revolution. To explain the significance of these developments for understanding the intersection between cognition and context, we look closely at behaviour in time and space. The implications of behaviouralism for institutions are briefly considered, emphasizing the role that collective action in or through institutions can play in ameliorating the adverse effects of behavioural biases and anomalies.

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Research on Bias of Owner's Decision-Making in Risk-Sharing in Construction Project - A Perspective of Bounded Rationality

Applied Mechanics and Materials ◽

10.4028/www.scientific.net/amm.357-360.2164 ◽

2013 ◽

Vol 357-360 ◽

pp. 2164-2170

Author(s):

Yi Lin Yin ◽

Zhi Chao Xu ◽

Qing Song Zou

Keyword(s):

Decision Making ◽

Risk Management ◽

Quantitative Analysis ◽

Bounded Rationality ◽

Loss Aversion ◽

Risk Sharing ◽

Dominant Strategy ◽

Game Model ◽

Ex Post ◽

The Cost

Bounded rationality has an important impact on owners decision-making of risk-sharing in the project. Based on the hypothesis of bounded rationality, the paper established a risk-sharing game model concerning owners reference dependency and loss aversion, as well as conducted the quantitative analysis. The finding shows that comparing with the hypothesis of rationality, if taking the ex-post transaction cost as reference, when owner considers that the cost of risk management is smaller, the bounded rationality would make the owner prefer the proper risk-sharing; when owner considers that the cost of risk management is larger, the owner would prefer the improper risk-sharing; when the objective cost of risk management is larger than the ex-post transaction, the improper risk-sharing would be owners dominant strategy, and bounded rationality has no impact on owners decision-making of risk-sharing.

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