Asymmetric and imperfect knowledge: a proposal to replace unbounded rationality with bounded rationality
The purpose of this thesis is to illustrate how the role of knowledge may be themissing link in economics and to argue that the assumption of unboundedrationality, which underpinned neoclassical economics, should be replaced bybounded rationality and that bounded rationality should be redefined as peopleare rational, but are constrained by asymmetric and imperfect knowledge. Thisdecomposition of bounded rationality makes it possible for us to operationalizebounded rationality, which was founded by Herbert Simon in the 1950s, but hasnot been widely adopted in economics because the concept was considered toodifficult to formalize.The inclusion of asymmetric and imperfect knowledge considerations inmicroeconomics provides new insights into the existence and boundaries offirms, the role and nature of institutions, financial market inefficiency andpolitical choices. The inclusion of asymmetric knowledge considerations inmacroeconomics can help explain the unequal distribution of wealth betweenindividuals, firms and nations. A lack of knowledge, and the difficulties inovercoming a lack of knowledge, can help to explain aspects of economicfluctuations, prices rigidities, monetary non-neutrality and unemployment.Most importantly, when the role of knowledge is considered, it provides betterexplanations to various anomalies in economics, helps reconciles differencesbetween various theories and may opens up the possibility of unifying variousschools of economic thought.
Year of publication: |
2007
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Institutions: | Cao, Cung, Economics, Australian School of Business, UNSW |
Publisher: |
Awarded by:University of New South Wales. School of Economics |
Subject: | Decision-making | Rational choice theory |
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