a1 Tel Aviv University and University College London.
This paper discusses a common criticism of economic models that depart from the standard rational-choice paradigm - namely, that the phenomena addressed by such models can be ‘rationalized’ by some standard model. I criticize this criterion for evaluating bounded-rationality models. Using a market model with boundedly rational consumers due to Spiegler (2006a) as a test case, I show that even when it initially appears that a bounded-rationality model can be rationalized by a standard model, rationalizing models tend to come with unwarranted ‘extra baggage’. I conclude that we should impose a greater burden of proof on rationalizations that are offered in refutation of bounded-rationality models.
(Online publication January 18 2011)
Ran Spiegler is a Professor of Economics at Tel Aviv University and University College London. His new book Bounded Rationality and Industrial Organization is forthcoming in Oxford University Press. His current research focuses on models of bounded rationality, especially in market contexts.
I thank Ayala Arad, Eddie Dekel, Yves Guéron, Barton Lipman, Ariel Rubinstein, participants at the 2009 San Sebastian Summer School in Economics and Philosophy and the 2010 Behavioral Economics conference at the Hebrew University, and the editor of this journal, for their comments. Financial support from the European Research Council, Grant no. 230251, as well as the ESRC (UK), is gratefully acknowledged.