UE815 - Behavioral economics and bounds on rationality

Intervenant·e·s

• Olivier Compte [référent·e]   ingénieur en chef, des ponts, des eaux et des forêts / Paris School of Economics (PJSE)
• Philippe Jehiel   ingénieur en chef, des ponts, des eaux et des forêts / Paris School of Economics (PJSE)

PART I (Jehiel)

The modern approach to solution concepts in games is by a learning story. Players may have wrong
expectations (either about the opponent’s play or about the assessment of their own strategy) to
start with, but as experience accumulates expectations should get closer to the truth: if behaviors
stabilize they should correspond to an equilibrium play. However, this view (at least applied in a strict
sense) seems less plausible in complex games. Think of chess. Predicting what the opponent will do
in more than a few steps ahead is impractical. Knowing or learning the value of a board position is
impossible (for most positions), even for the best chess players. Such simple considerations suggest
the need to develop models of bounded rationality, which may next be used to approach a number
of economic interactions in a new way. The objective of the course is to stimulate new research in
game theory and applications that maintains the game theoretic tradition of high logical standards
while incorporating elements of bounded rationality/behavioral economics in the analysis. Various
approaches to behavioral economics and bounded rationality are discussed in the course.

Part II (Compte)

The objective of the class is to take a critical journey across economic theory (decision theory under uncertainty, auctions, repeated games, reputation, information transmission...).
Our models generally assume that agents now with precision the environment they face, or the exact distributions over the parameters that the analyst assumes. This places strong cognitive demands on agents, or it gives agents extraordinary powers of discernment. Our aim will be to identify these cognitive demands, highlight how our intuitions are shaped by (and sometimes hinge on) these demands, and suggest alternative models that assume lesser sophistication on agents.

Along the way, we shall also review how the path proposed, based on direct strategy restrictions, compete with other methods for limiting the rationality of economic agents.