Abstract
In this chapter we explicitly model the process of the decision making by economic agents. This gives rise to dynamic models of bounded rationality, where agents adjust their choices with time in a way they consider beneficial.
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Notes
- 1.
See, Basov (2003) for details.
- 2.
Propensity to experiment may have evolved in our ancestors to prevent them from getting stuck in a local optimum. For example, when looking for the optimal fishing spot along a river, they may have found the one that dominates all the nearby locations, but even a better spot may be located a mile away.
- 3.
This intuition is a little misleading since in the equilibrium the principal knows the effort. However, to create correct incentives, she should pretend that she does not know and behave as a statistician who tries to estimate effort from available data.
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Basov, S. (2016). Bounded Rationality, Learning, and Optimal Contracts. In: Social Norms, Bounded Rationality and Optimal Contracts. Studies in Economic Theory, vol 30. Springer, Singapore. https://doi.org/10.1007/978-981-10-1041-5_6
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