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Asymmetric and imperfect knowledge: a proposal to replace unbounded rationality with bounded rationality

The purpose of this thesis is to illustrate how the role of knowledge may be the missing link in economics and to argue that the assumption of unbounded rationality, which underpinned neoclassical economics, should be replaced by bounded rationality and that bounded rationality should be redefined as people are rational, but are constrained by asymmetric and imperfect knowledge. This decomposition of bounded rationality makes it possible for us to operationalize bounded rationality, which was founded by Herbert Simon in the 1950s, but has not been widely adopted in economics because the concept was considered too difficult to formalize. The inclusion of asymmetric and imperfect knowledge considerations in microeconomics provides new insights into the existence and boundaries of firms, the role and nature of institutions, financial market inefficiency and political choices. The inclusion of asymmetric knowledge considerations in macroeconomics can help explain the unequal distribution of wealth between individuals, firms and nations. A lack of knowledge, and the difficulties in overcoming a lack of knowledge, can help to explain aspects of economic fluctuations, prices rigidities, monetary non-neutrality and unemployment. Most importantly, when the role of knowledge is considered, it provides better explanations to various anomalies in economics, helps reconciles differences between various theories and may opens up the possibility of unifying various schools of economic thought.
Date January 2007
CreatorsCao, Cung, Economics, Australian School of Business, UNSW
PublisherAwarded by:University of New South Wales. School of Economics
Source SetsAustraliasian Digital Theses Program
Detected LanguageEnglish
RightsCopyright Cung Cao,

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