A Course in “Bounded rationality”
Ran Spiegler
rani@post.tau.ac.il
(*) The starred papers can be chosen for referee reports.
General references
1. Camerer C. (1994). “Individual Decision Making.” In J. Kagel and A. Roth, eds.,
Handbook of Experimental Economics, 587-704. Princeton University Press.
2. Rabin M. (1998). “Psychology and Economics.” Journal of Economic Literature
36, 11-46.
3. Rubinstein A. (1998). Modeling Bounded Rationality. MIT Press. [MBR]
4. Simon H. (1982). Models of Bounded Rationality. MIT Press.
5. Thaler R. (1992). The Winner’s Curse. Princeton University Press. [WC]
Plan of the course
1. Stretching maximization
i. Rationalization
ii. Preferences in multi-period decision problems
iii. Preferences over beliefs
iv. Social preferences
v. Preferences for simplicity in games
2. Beyond maximization
i.
Similarity
ii.
Imperfect knowledge
iii.
Imperfect recall
iv.
New notions of equilibrium behavior in games
1
A. Stretching maximization
I. Rationality and rationalization: the case of decision under risk
1. MBR: Ch. 1
2. WC: Ch. 6-7
3. Kalai G., A. Rubinstein and R. Spiegler (2002). “Rationalizing Choice Functions
by Multiple Rationales.” Econometrica, forthcoming.
4. Rabin M. (2000). “Risk Aversion and Expected-Utility Theory: A Calibration
Theorem.” Econometrica 68, 1281-1292.
5. Sen A. (1993). “Internal Consistency of Choice.” Econometrica 61, 495-521.
6. Tversky A. and D. Kahneman and (1979). “Prospect Theory: An Analysis of
Decision under Risk.” Econometrica 47, 263-297.
7. Yaari M. (1985). “On the Role of ‘Dutch Books’ in the Theory of Choice under
Risk.” 1985 Nancy Schwartz memorial Lecture.
II. Dynamic Choice
1. Elster J. and G. Lowenstein, eds. (1992). Choice over Time. Russell Sage
Foundation.
2. Kreps D. (1988). Notes on the Theory of Choice, Ch. 13. Westview Press. [NTC]
3. WC, Ch. 8.
II.1. Dynamically inconsistent preferences
1. Halevy Y. (2002). “The Structure of Inter-temporal Preferences under Uncertain
Lifetime.” http://www.econ.ubc.ca/halevy/disc502.pdf
2. Laibson D. (1997). “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal
of Economics 62, 443-477.
3. T. O'Donoghue and M. Rabin (1999). “Doing It Now or Later.” American
Economic Review 89, 103-124.
4. Peleg B. and M. Yaari (1973). “On the Existence of a Consistent Course of Action
when Tastes are Changing.” Review of Economic Studies 40, 391-401.
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5. Rubinstein A. (2002). “Comments on Risk and Time Preferences in Economics.”
http://arielrubinstein.tau.ac.il/~ariel/papers/rabin3.pdf
6. Strotz R. (1955). “Myopia and Inconsistency in Dynamic Utility Maximization.”
Review of Economic Studies 23, 165-180.
II.2. Preferences over menus and decision paths
1. (*) Dekel E., B. Lipman and A. Rustichini (2001). “Representing Preferences with
a Unique Subjective State Space.” Econometrica 69, 891-934.†
2. Gul F. and W. Pesendorfer (2001). “Temptation and Self-Control.” Econometrica
69, 1403-1435.
3. Gul F. and W. Pesendorfer (2002). “Temptation and the Theory of Consumption.”
http://www.princeton.edu/~pesendor/work/self-control2.pdf
4. Kreps D. (1979). “A Representation Theorem for ‘Preference for Flexibility’”.
Econometrica 47, 565-578.
5. (*) Kreps D. and E. Porteus (1979). “Temporal Von Neumann-Morgenstern and
Induced Preferences.” Journal of Economic Theory 20, 81-109.
6. Kreps D. (1992). “Static Choice and Unforeseen Contingencies,” in Economic
Analysis of Markets and Games: Essays in Honor of Frank Hahn, P. Dasgupta and
D. Gale, O. Hart and E. Maskin, eds., MIT Press, 259-281.
II.3. Alternative approaches
1. Cailluad B., D. Cohen and B. Jullien (1999). “Toward a Theory of Self-Restraint.”
http://www.idei.asso.fr/Commun/Articles/Jullien/CCJ.pdf
2. Jehiel P. and A. Lilico (2002). “Smoking Today and Stopping Tomorrow: A
Limited Foresight Perspective.” Mimeo, UCL.
3. Kahneman D., P. Wakker and R. Sarin (1997). “Back to Bentham? Explorations
of Experiences Utility.” Quarterly Journal of Economics 112, 375-406.
4. Rubinstein A. (2001). “Is It ‘Economics and Psychology’? : The Case of
Hyperbolic Discounting.” http://arielrubinstein.tau.ac.il/delta3.pdf
†
You will need to consult the paper by Kreps (1979) (no. 4 in this reading list).
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III. Preferences over beliefs
1. Akerlof G. and W. Dickens (1982). “The Economic Consequences of Cognitive
Dissonance.” American Economic Review 72, 307-319.
2. Caplin A. and J. Leahy (1999). “The Supply of Information by a Concerned
Expert.” Research Report 99-08, C.V. Starr Center, NYU, (1999).
3. Eliaz K. and R. Spiegler (2002). “Can Anticipatory Feelings Explain Anomalous
Attitudes to Information?” http://www.tau.ac.il/~rani/signals.pdf
4. Geanakopolos J., D. Pearce and E. Stachetti (1989). “Psychological Games and
Sequential Rationality.” Games and Economic Behavior 1, 60-79.
IV. Social preferences
1. Fehr E. and K. Schmidt (2001). “Theories of Fairness and Reciprocity: Evidence
and Economic Implications.” http://www.iew.unizh.ch/wp/iewwp075.pdf
2. (*) Glazer J. and A. Rubinstein (1998). “Motives and Implementation: On the
Design of Mechanisms to Elicit Opinions.” Journal of Economic Thoery 79, 157173.
3. (*) Rabin M. (1993). “Incorporating Fairness into Game Theory and Economics.”
American Economic Review 83, 1281-1302.
4. (*) Segal U. and J. Sobel (1999). “Tit for Tat: Foundations of Preferences for
Reciprocity in Strategic Settings.”
ftp://weber.ucsd.edu/pub/econlib/dpapers/ucsd9910.pdf
5. Sobel J. (2001). “Interdependent Preferences and Reciprocity.”
http://www.econ.ucsd.edu/%7Ejsobel/Papers/IPRdraft.pdf
V. Preferences for simplicity in games
1. MBR: Ch. 8
2. Abreu D. and A. Rubinstein (1988). “The Structure of Nash Equilibrium in
Repeated Games with Finite Automata.” Econometrica 56, 1259-1282.
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3. Banks J. and R. Sundaram (1990). “Repeated Games, Finite Automata and
Complexity.” Games and Economic Behavior 2, 97-117.
4. (*) Ben-Porath E. (1993). “Repeated Games with Finite Automata.” Journal of
Economic Theory 59, 17-32.
5. (*) Chatterjee K. and H. Sabourian (2000). “Multiperson Bargaining and Strategic
Complexity.” Econometrica 68, 1491-1509.
6. (*) Cho. I. (1995). “Perceptrons Play the Repeated Prisoner’s Dilemma.” Journal
of Economic Theory 67, 266-284.
7. (*) Eliaz K. (2002). “Nash Equilibrium when Players Account for the Complexity
of their Forecasts.” Games and Economic Behavior, forthcoming.
8. Spiegler R. (2002). “Simplicity of Beliefs and Delay Tactics in a Concession
Game.” Mimeo, Tel Aviv University.
B. Beyond maximization
VI. Decision procedures based on similarity
1. MBR: Ch. 2
2. (*) Gilboa I. And D. Schmeidler (2001). A Theory of Cased-Based Decisions
Cambridge University Press.‡
3. Rubinstein A. (1988). “Similarity and Decision-Making under Risk.” Journal of
Economic Theory 46, 145-153.
4. Rubinstein A. (2001). “Is It ‘Economics and Psychology’? : The Case of
Hyperbolic Discounting.” http://arielrubinstein.tau.ac.il/delta3.pdf
5. Tversky A. (1977). “Features of Similarity.” Psychological Review 84, 327-352.
‡
Chapters 2 & 3.
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VII. Imperfect knowledge
VII.1. Formalizing imperfect knowledge
1. MBR: Ch. 3
2. Geanakopolos J. (1992). “Common knowledge, Bayesian Learning and Market
Speculation with Bounded Rationality.” Journal of Economic Perspectives 6, 5882.
3. (*) Dekel E., B. Lipman and A. Rustichini (1998). “Standard State-Space Models
Preclude Unawareness.” Econometrica 66, 159-174.§
4. Lipman B. (1995). “Information Processing and Bounded Rationality: A Survey.”
Canadian Journal of Economics 28, 42-67.
5. Lipman B. (1999). “Decision Theory without Logical Omniscience: Toward an
Axiomatic Framework for Bounded Rationality.” Review of Economic Studies 66,
339-361.
6. (*) Morris S. (1996). “The Logic of Belief and Belief Change: A Decision
Theoretic Approach.” Journal of Economic Theory 69, 1-23.
VII.2. Manipulating imperfect knowledge
1. MBR: Ch. 5
2. Dow J. (1991). “Search Decisions with Limited Memory.” Review of Economic
Studies 58, 1-14.
3. (*) Rubinstein A. (1993). “On Price Recognition and Computational Complexity
in a Monopolistic Model.” Journal of Political Economy 101 (1993), 473-484.
4. Piccione M. and A. Rubinstein (2002). “Modeling the Economic Interaction of
Agents with Diverse Abilities to Recognize Equilibrium Patterns.”
http://arielrubinstein.tau.ac.il/papers/memory.pdf
§
This paper will have to be read together with a paper by Modica and Rustichini to which the paper
refers.
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VII.3. Imperfect provability
1. (*) Glazer J. and A. Rubinstein (2000). “Debates and Decisions: On a Rationale of
Argumentation Rules.” Games and Economic Behavior 36, 158-173.
2. (*) Lipman B. and D. Seppi (1995). “Robust Inference in Communication Games
with Partial Provability.” Journal of Economic Theory 66, 370-405.
3. Spiegler R. (2002). “Argumentation in Multi-Issue Debates.”
http://www.tau.ac.il/~rani/debatesmay2002.pdf
VIII. Imperfect Recall
1. MBR: Ch. 4
2. Games and Economic Behavior 20 (1997): Symposium on imperfect recall
3. Wilson A. (2002. “Bounded Memory and Biases in Information Processing.”
http://www.econ.princeton.edu/microtheory/Wilson.pdf
IX. Equilibrium concepts based on procedural rationality
1. MBR: Ch. 7
2. (*) Jehiel P. (2001). “Analogy-Based Expectation Equilibrium.”
http://www.enpc.fr/ceras/jehiel/analrev.pdf
3. (*) McKelvey R. and T. Palfrey (1995). “Quantal Response Equilibria for Normal
Form Games.” Games and Economic Behavior 10, 6-38.
4. Osborne M. and A. Rubinstein (1998). “Games with Procedurally Rational
Players.” American Economic Review 88, 834-847.
5. Spiegler R. (2002). “Equilibrium in Justifiable Strategies: A Model of ReasonBased Choice in Extensive-Form Games.” Review of Economic Studies,
forthcoming.
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X. Further readings
Procedural learning

Gilboa I. And D. Schmeidler (2000). “Inductive Inference: An Axiomatic
Approach.”
http://www.tau.ac.il/~igilboa/Personal/Gilboa_Schmeidler_Inductive_Inferenc
e.pdf

(*) Jehiel P. and D. Samet (2000). “Learning To Play Games In Extensive
Form By Valuation.” http://www.tau.ac.il/~samet/learning-by-valuation.pdf

Lam R. (2000). “Learning Through Stories.” Mimeo, Yale.

Maenner E. (2001). “Learning to be Simple: Adaptation and Complexity in the
Repeated Prisoner's Dilemma.” Mimeo, PSU.
Computability

MBR: Ch. 10
Limited Foresight

(*) Jehiel P. (2001). “Limited Foresight may Force Cooperation.” Review of
Economic Studies 68, 369-391.
Mechanism design and bounded rationality

(*) Eliaz K. (2002). “Fault-Tolerant Implementation.” Review of Economic
Studies 69(3), 589-610.
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