Monday, April 1, 2013

Modeling Bounded Rationality at the World Bank

Modeling Bounded Rationality at the World Bank

By Sagar Rijal

Although Washington D.C. is the center for applied public policy, every so often there is a lecture on pure economic theory for which the practical application is not even confirmed. Such was the case of Dr. Ariel Rubinstein’s lecture on “Directions in Modeling Bounded Rationality” at the World Bank on Thursday March 28. Dr. Kausaik Basu the Chief Economist of development economics group at the Bank, introduced Dr. Rubinstein as the foremost theoretician of game theory and advanced formal research on “bounded rationality” in the last twenty years. Dr. Rubenstein did nothing to diminish his reputation. His presentation was quite esoteric, formal and not exactly geared to a layperson. Dr. Basu’s claim that the work would influence policy and debate on the field regarding the use of behavioral economics and meaningful rationality did not seem to bear out. Instead, the takeaway might have been the deeper questions regarding the value of basic theoretical research and its application to public policy problems. All we can say is that what is rationality and how agents use rationality in their actions is contingent upon the rules of the game.

Dr. Rubinstein presented his recent paper that he co-authored with Dr. Jacob Glazer, his colleague at Tel Aviv University, Israel. The premise of the highly technical and formal paper is that the rationality principle that undergirds much of economic theory is highly contingent so that agents who are knowledgeable or astute can play the game by learning how to change their true choices based on the rules of the game. The game as presented is a persuasion or selection situation, a variation of the leader-follower game, which the authors call the listener-speaker game. In this game the listener presents her profile of information to which the speaker offers a matrix of conditions with which to judge the listener’s profile. Upon listening to the conditions the listener has to respond. The implication of the model is that “boundedly rational” agents might respond to the speaker’s conditions by telling the truth or lying.   

What is the “practical implication” of Dr. Rubinstein research presentation? After presenting his model and the implications of the model, even the author was non-committal of the practical implication of this or any other theoretical model. He insisted that as an economic theorist who tries to replicate a slice of reality into his highly stylized models, he is way of making grand pronouncements or sweeping conclusions. As a way of example, Dr. Rubinstein jokingly warned that no one should ask a game theorist if Israel should attack Iran. For game theorists who work in IR, such questions might be the ultimate application.

Because the forum for the lecture was the World Bank and not an academic conference, the question of application was paramount. How do pure theoretical research benefit the policy and practice of economics, especially developmental economics? Again Dr. Rubenstein was dismissive of such concerns suggesting that these are highly formalized models, which approximate reality but cannot replicate it. As such these models would be meaningless or contradictory if the “rules or procedures” of the game is tweaked to fit a different context. Yet, in his closing remarks, Dr. Basu, being the chief economist of the Bank, tried to defend formal models and their application to practical questions and suggested it was up to the researchers working in practical projects to find useful applications of formal model, such as the one presented by Dr. Rubinstein.  

  ~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.
He can be reached at

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