A New Tractable Approach for Bounded Rationality in Economics

This research project formulates a new model of bounded rationality, based on the idea that agents will keep a simple, or “sparse,” model of the world.

A key open question in economics is the modeling of bounded rationality, i.e., formulating a mathematical language to model what people do when they do not fully understand their environment. This question is important since most models assume that people are perfectly rational. This project allows for the injection of dimensions of bounded rationality in the key parts of economics, such as macroeconomics and finance, which improves the basic understanding of economic outcomes and, in turn, economic policies.