RESEARCH PAPER NO. 864

BOUNDED RATIONALITY: STATIC VERSUS DYNAMIC APPROACH

BY

SUREN BASOV

DECEMBER 2002

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

Two kinds of theories of the boundedly rational behavior are possible.  Static theories focus on stationary behavior and do not include any explicit mechanism for temporal change.  Dynamic theories, on the other hand, explicitly model the fine-grain adjustments made by the subjects in response to their recent experiences.  The main contribution of this paper is to argue that the restrictions usually imposed on the distribution of choices in the static approach are generically not supported by an explicit adjustment mechanism.

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