Bounded arbitrage and nearly rational behavior
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arXiv
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| Format: | Preprint |
| Published: |
2022
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| _version_ | 1866915254080897024 |
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| author | Nascimento, Leandro |
| author_facet | Nascimento, Leandro |
| contents | We establish the equivalence between a principle of almost absence of arbitrage opportunities and nearly rational decision-making. The implications of such principle are considered in the context of the aggregation of probabilistic opinions and of stochastic choice functions. In the former a bounded arbitrage principle and its equivalent form as an approximately Pareto condition are shown to bound the difference between the collective probabilistic assessment of a set of states and a linear aggregation rule on the individual assessments. In the latter we show that our general principle of limited arbitrage opportunities translates into a weakening of the McFadden-Richter axiom of stochastic rationality, and gives an upper bound for the minimum distance of a stochastic choice function to another in the class of random utility maximization models. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2212_02680 |
| institution | arXiv |
| publishDate | 2022 |
| record_format | arxiv |
| spellingShingle | Bounded arbitrage and nearly rational behavior Nascimento, Leandro Theoretical Economics We establish the equivalence between a principle of almost absence of arbitrage opportunities and nearly rational decision-making. The implications of such principle are considered in the context of the aggregation of probabilistic opinions and of stochastic choice functions. In the former a bounded arbitrage principle and its equivalent form as an approximately Pareto condition are shown to bound the difference between the collective probabilistic assessment of a set of states and a linear aggregation rule on the individual assessments. In the latter we show that our general principle of limited arbitrage opportunities translates into a weakening of the McFadden-Richter axiom of stochastic rationality, and gives an upper bound for the minimum distance of a stochastic choice function to another in the class of random utility maximization models. |
| title | Bounded arbitrage and nearly rational behavior |
| topic | Theoretical Economics |
| url | https://arxiv.org/abs/2212.02680 |