Economics: Rationality and Evolutionary Theory

Economics: Rationality and Evolutionary Theory

Introduction

The study is related to the overly and unrealistic demanding assumptions of individual rationality which are the criticisms of Individual choice theory and Game theory. This paper is going to be focused on arguing whether the evolutionary approach is successful in addressing the criticism that, in neoclassical economics, the profile of the rational individual is not very realistic.

Discussion

In my own view the assumptions that individuals act rationally may be viewed as ignoring key aspects of human behavior. Many past researchers believe that the economically defined people are different from the real people (Fudenberg, 1991).

The individual choice theory perspectives and a usual game theoretic model specify some essential aspects of a situation of interest and try to make logical inferences about ensuing outcomes given the initial setup. There can be a simple election model, for instance, where there are two candidates who want to win the election and n voters who want to elect the candidate who is going to make policies that are beneficial for the voters. Two candidates announce their respective policy platforms, and voters vote. Whoever gets the majority of votes wins and makes policies (Glasser, 1998). Given the initial setting, the solution to the game provides logically deduced inferences about outcomes of interest, such as who can win under which conditions and which policies should be followed. This example shows the limitation of choices people have based on the assumptions of choice theory. Before studying evolutionary approach, let's first study the assumptions of Nash equilibrium.

The Nash Equilibrium was presented in 1950, and it is the main concept, which has been used in the game theory for analyzing games (Glasser, 1998).

There are three basic assumptions for Nash Equilibrium:-

Both the players are trying to make the most of the probable utility.

Fact (z) is common knowledge between actors. Player C recognizes that R is rational. R are recognizes that C is rational. Furthermore, C also recognizes that R recognizes that C is rational, and R also recognizes that C recognizes that R is rational. This phenomenon is known as knowledge of rationality.

Consistently aligned beliefs are held by actors in a Nash Equilibrium, that is what they consider that the other player will execute is eventually confirmed. Analyzing the lunch game, examine the option where both friends choose A. Since you chose A, you also believed that friend will also select A. Since, friend also chose A, your conviction was established. The same is happening with friend (Vincent & Brown, 2005). These assumptions are limited and do not include dynamics of time, change and technology.

Evolutionary approach is devoted to the basic tenets of critical evaluation of the individual choice theory and game theory. The focus of the evolutionary theory of irreversible processes is dynamic changes in the economic system. In this context, supporters of evolutionary theory see it as a logical development of ideas in context of unrealistic and overly demanding assumptions on individual rationality. The most important innovation associated with the use of these concepts is the rejection of the notion of a ...