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Structural stability and robustness to bounded rationality

Record type: Monograph (Discussion Paper)

The introduction of a small amount of bounded rationality into a model sometimes has little effect, and sometimes has a dramatic impact on predicted behavior. We call a model robust to bounded rationality if small deviations from rationality result only in small changes in the equilibrium set. We also say that a model is structurally stable if the equilibrium set (given fully rational agents) varies continuously with the parameter values of the model.
Our notions of a model and of rationality are quite broad, allowing us to cover cases in which bounded rationality refers to imperfect optimization, non-rational expectations, or arbitrary behavior by a subset of agents. We show that a model is robust to bounded rationality if and only if it is structurally stable. Thus, we can characterize which models will be robust to bounded rationality and which ones will not, independently of the exact form that bounded rationality takes. In addition, from our characterization it follows that introducing a small amount of bounded rationality will have large effects on predicted outcomes if and only if parameters are near a critical point where the equilibrium set changes in a discontinuous way

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Anderlini, Luca and Canning, David (2000) Structural stability and robustness to bounded rationality , Southampton, UK University of Southampton (Discussion Papers in Economics and Econometrics, 2).

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Published date: 2000
Additional Information: JEL classification: C69, C79, D51, E19


Local EPrints ID: 33107
PURE UUID: 55bf5148-c229-4566-8a8a-a57520b326dd

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Date deposited: 17 Jul 2006
Last modified: 17 Jul 2017 15:54

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Author: Luca Anderlini
Author: David Canning

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