RESEARCH PAPER NO. 874

BOUNDED RATIONALITY: STATIC VERSUS DYNAMIC APPROACHES

BY

SUREN BASOV

FEBRUARY 2003

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

Two kinds of theories of 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 a dynamic adjustment mechanism.  The genericity here is understood both in the measure theoretic and  in the topological sense.