Economics is a social science which, therefore, focuses on people and on
the decisions they make, be it in an individual context, or in group situations.
It studies human choices, in face of needs to be fulfilled, and a limited amount
of resources to fulfill them. For a long time, there was a convergence between
the normative and positive views of human behavior, in that the ideal and
predicted decisions of agents in economic models were entangled in one single
concept. That is, it was assumed that the best that could be done in each
situation was exactly the choice that would prevail. Or, at least, that the facts
that economics needed to explain could be understood in the light of models
in which individual agents act as if they are able to make ideal decisions.
However, in the last decades, the complexity of the environment in which
economic decisions are made and the limits on the ability of agents to deal
with it have been recognized, and incorporated into models of decision making
in what came to be known as the bounded rationality paradigm. This was
triggered by the incapacity of the unboundedly rationality paradigm to explain
observed phenomena and behavior. This thesis contributes to the literature
in three different ways. Chapter 1 is a survey on bounded rationality, which gathers and organizes
the contributions to the field since Simon (1955) first recognized the necessity
to account for the limits on human rationality. The focus of the survey is
on theoretical work rather than the experimental literature which presents
evidence of actual behavior that differs from what classic rationality predicts.
The general framework is as follows. Given a set of exogenous variables, the
economic agent needs to choose an element from the choice set that is avail-
able to him, in order to optimize the expected value of an objective function
(assuming his preferences are representable by such a function). If this problem is too complex for the agent to deal with, one or more of its elements is
simplified. Each bounded rationality theory is categorized according to the
most relevant element it simplifes.
Chapter 2 proposes a novel theory of bounded rationality. Much in the
same fashion as Conlisk (1980) and Gabaix (2014), we assume that thinking
is costly in the sense that agents have to pay a cost for performing mental
operations. In our model, if they choose not to think, such cost is avoided,
but they are left with a single alternative, labeled the default choice. We exemplify the idea with a very simple model of consumer choice and identify the
concept of isofin curves, i.e., sets of default choices which generate the same
utility net of thinking cost. Then, we apply the idea to a linear symmetric
Cournot duopoly, in which the default choice can be interpreted as the most
natural quantity to be produced in the market. We find that, as the thinking
cost increases, the number of firms thinking in equilibrium decreases. More
interestingly, for intermediate levels of thinking cost, an equilibrium in which
one of the firms chooses the default quantity and the other best responds to
it exists, generating asymmetric choices in a symmetric model. Our model is
able to explain well-known regularities identified in the Cournot experimental
literature, such as the adoption of different strategies by players (Huck et al.
, 1999), the inter temporal rigidity of choices (Bosch-Dom enech & Vriend,
2003) and the dispersion of quantities in the context of di cult decision making (Bosch-Dom enech & Vriend, 2003).
Chapter 3 applies a model of bounded rationality in a game-theoretic set-
ting to the well-known turnout paradox in large elections, pivotal probabilities
vanish very quickly and no one should vote, in sharp contrast with the ob-
served high levels of turnout. Inspired by the concept of rhizomatic thinking,
introduced by Bravo-Furtado & Côrte-Real (2009a), we assume that each per-
son is self-delusional in the sense that, when making a decision, she believes
that a fraction of the people who support the same party decides alike, even
if no communication is established between them. This kind of belief simplifies the decision of the agent, as it reduces the number of players he believes
to be playing against { it is thus a bounded rationality approach. Studying
a two-party first-past-the-post election with a continuum of self-delusional
agents, we show that the turnout rate is positive in all the possible equilibria,
and that it can be as high as 100%. The game displays multiple equilibria,
at least one of which entails a victory of the bigger party. The smaller one
may also win, provided its relative size is not too small; more self-delusional
voters in the minority party decreases this threshold size. Our model is able
to explain some empirical facts, such as the possibility that a close election
leads to low turnout (Geys, 2006), a lower margin of victory when turnout is
higher (Geys, 2006) and high turnout rates favoring the minority (Bernhagen
& Marsh, 1997)