Complexity and Behavioral Economics

J. Barkley Rosser, Jr., James Madison University, Harrisonburg, VA
Marina V. Rosser, James Madison University, Harrisonburg, VA

Abstract: This paper will consider the relationship between complexity economics and behavioral economics. A crucial key to this is to understand that Herbert Simon was both the founder of explicitly modern behavioral economics as well as one of the early developers of complexity theory. Bounded rationality was essentially derived from Simon”s view of the impossibility of full rationality on the part of economic agents. Modern complexity theory through such approaches as agent-based modeling offers an approach to understanding behavioral economics by allowing for specific behavioral responses to be assigned to agents who interact within this context, even without full rationality. Other parts of modern complexity theory are considered in terms of their relationships with behavioral economics. Fundamentally, complexity provides an ultimate foundation for bounded rationality and hence the need to use behavioral economics in a broader array of contexts than most economists have thought appropriate.

Keywords: complexity, behavioral economics, bounded rationality