Agents in Economic Markets and Games
125
to the discussion of free market which was much celebrated by economists
thereafter. Smith argued that people’s personal relationships contribute to
the way markets behave [185]. The theory of ‘invisible hand’ encourages the
laissez-faire policy adopted by most governments that allows events to take
their own toll and have less interference with behavior of markets as they
shape themselves.
Similar theories were adopted by neoclassical economics which gave birth
to rational consumers and buyers, assuming every individual is making the
right choice to maximize their own utility or profit. Conventional models of
markets used assumptions of this ‘rational choice’ and ‘efficient market hypothesis’, but were limited to explain real market performance in situations
of trading and volatility as observed in the real world.
6.1 Perfect Rationality versus Bounded Rationality
Friedman [70] presented ideas around how exaggerated assumptions will
not matter in economics when the economic models being written were making
correct predictions. Even if individuals were assumed to be perfectly rational,
it would not make any difference on the results if they were making irrational
decisions. Comparatively, Simon presented a counter argument on bounded
rationality.
“Economics illustrates well how outer and inner environments interact and, in particular, how an intelligent system’s adjustment to its outer
environment (its substantive rationality) is limited by its ability, through
knowledge and computation to discover appropriate adaptive behavior
(its procedural rationality).” [179]
Every individual is selfish and the information each individual has is different. The decisions are made, based on what the individual knows, giving rise
to bounded rationality, where there is rationality depending on the bounds of
the individual’s information space.
125
to the discussion of free market which was much celebrated by economists
thereafter. Smith argued that people’s personal relationships contribute to
the way markets behave [185]. The theory of ‘invisible hand’ encourages the
laissez-faire policy adopted by most governments that allows events to take
their own toll and have less interference with behavior of markets as they
shape themselves.
Similar theories were adopted by neoclassical economics which gave birth
to rational consumers and buyers, assuming every individual is making the
right choice to maximize their own utility or profit. Conventional models of
markets used assumptions of this ‘rational choice’ and ‘efficient market hypothesis’, but were limited to explain real market performance in situations
of trading and volatility as observed in the real world.
6.1 Perfect Rationality versus Bounded Rationality
Friedman [70] presented ideas around how exaggerated assumptions will
not matter in economics when the economic models being written were making
correct predictions. Even if individuals were assumed to be perfectly rational,
it would not make any difference on the results if they were making irrational
decisions. Comparatively, Simon presented a counter argument on bounded
rationality.
“Economics illustrates well how outer and inner environments interact and, in particular, how an intelligent system’s adjustment to its outer
environment (its substantive rationality) is limited by its ability, through
knowledge and computation to discover appropriate adaptive behavior
(its procedural rationality).” [179]
Every individual is selfish and the information each individual has is different. The decisions are made, based on what the individual knows, giving rise
to bounded rationality, where there is rationality depending on the bounds of
the individual’s information space.