Bounded Rationality and the Network Economist's Dilemma

Abstract

The economic literatures on bounded rationality and on social networks stand to benefit from a closer relationship. Despite concerns about the cognitive demands of rational choice, models which explicitly account for the cognitive costs of decision making have yet to gain significant traction. I argue that the theory of social networks is an ideal domain for these models to showcase novel insights that other approaches cannot replicate. The complexity of behavior in social networks creates what I call the "network economist's dilemma." Economists must either simplify the environment in their models or simplify the decision rules agents use, and so far approaches on the two extremes have dominated the literature. Simplifying the environment while retaining fully rational behavior poses issues of tractability and realism, while modeling agents following heuristic decision rules prevents the study of core economic concepts. This dilemma has hindered the study of many important questions, but insights from the bounded rationality literature could offer a middle path.

Keywords: Bounded Rationality, Social Networks