ORCID Profile
0000-0002-2466-5264
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Publisher: Springer Science and Business Media LLC
Date: 17-05-2023
DOI: 10.1007/S11238-023-09941-Z
Abstract: While game theory has been transformative for decision making, the assumptions made can be overly restrictive in certain instances. In this work, we investigate some of the underlying assumptions of rationality, such as mutual consistency and best response, and consider ways to relax these assumptions using concepts from level- k reasoning and quantal response equilibrium (QRE) respectively. Specifically, we propose an information-theoretic two-parameter model called the quantal hierarchy model, which can relax both mutual consistency and best response while still approximating level- k , QRE, or typical Nash equilibrium behavior in the limiting cases. The model is based on a recursive form of the variational free energy principle, representing higher-order reasoning as (pseudo) sequential decision-making in extensive-form game tree. This representation enables us to treat simultaneous games in a similar manner to sequential games, where reasoning resources deplete throughout the game-tree. Bounds in player processing abilities are captured as information costs, where future branches of reasoning are discounted, implying a hierarchy of players where lower-level players have fewer processing resources. We demonstrate the effectiveness of the quantal hierarchy model in several canonical economic games, both simultaneous and sequential, using out-of-s le modelling.
Publisher: Springer Science and Business Media LLC
Date: 22-03-2021
Publisher: ACM
Date: 25-06-2020
Publisher: IEEE
Date: 07-2018
Publisher: ACM
Date: 13-07-2019
Publisher: The Royal Society
Date: 02-2023
DOI: 10.1098/RSOS.221164
Abstract: The efficient market hypothesis (EMH), based on rational expectations and market equilibrium, is the dominant perspective for modelling economic markets. However, the most notable critique of the EMH is the inability to model periods of out-of-equilibrium dynamics without significant external news. When such dynamics emerge endogenously, the traditional economic frameworks prove insufficient. This work offers an alternate perspective explaining the endogenous emergence of punctuated out-of-equilibrium dynamics based on bounded rational agents. In a concise market entrance game, we show how boundedly rational strategic reasoning can lead to endogenously emerging crises, exhibiting fat tails in returns. We also show how other common stylized facts, such as clustered volatility, arise due to agent ersity (or lack thereof) and the varying learning updates across the agents. This work explains various stylized facts and crisis emergence in economic markets, in the absence of any external news, based on agent interactions and bounded rational reasoning.
Publisher: IEEE
Date: 07-2020
Publisher: MDPI AG
Date: 26-05-2021
DOI: 10.3390/E23060669
Abstract: Bounded rationality is an important consideration stemming from the fact that agents often have limits on their processing abilities, making the assumption of perfect rationality inapplicable to many real tasks. We propose an information-theoretic approach to the inference of agent decisions under Smithian competition. The model explicitly captures the boundedness of agents (limited in their information-processing capacity) as the cost of information acquisition for expanding their prior beliefs. The expansion is measured as the Kullblack–Leibler ergence between posterior decisions and prior beliefs. When information acquisition is free, the homo economicus agent is recovered, while in cases when information acquisition becomes costly, agents instead revert to their prior beliefs. The maximum entropy principle is used to infer least biased decisions based upon the notion of Smithian competition formalised within the Quantal Response Statistical Equilibrium framework. The incorporation of prior beliefs into such a framework allowed us to systematically explore the effects of prior beliefs on decision-making in the presence of market feedback, as well as importantly adding a temporal interpretation to the framework. We verified the proposed model using Australian housing market data, showing how the incorporation of prior knowledge alters the resulting agent decisions. Specifically, it allowed for the separation of past beliefs and utility maximisation behaviour of the agent as well as the analysis into the evolution of agent beliefs.
No related grants have been discovered for Benjamin Patrick Evans.