A Theory of Aggregate Rationality

47 Pages Posted: 22 Dec 2020

See all articles by Zachary Wojtowicz

Zachary Wojtowicz

Harvard Graduate School of Arts and Sciences; Harvard Business School

Date Written: October 23, 2020

Abstract

This paper develops a psychologically micro-founded model of economic learning. Contrary to intuition, it is shown that a large population of boundedly rational learners will, under certain circumstances, aggregate to a fully rational representative agent, even when no individual solves—or even considers—the entire inference problem on their own. The theory places conditions on the emergence of aggregately rationality and characterizes the information-processing frictions that arise when those conditions are not met. This economic implications of the model are developed in the context of a market for Arrow securities, where it is shown that market efficiency depends on the ability of prices to combine the information-processing capacity of many agents.

Suggested Citation

Wojtowicz, Zachary, A Theory of Aggregate Rationality (October 23, 2020). Available at SSRN: https://ssrn.com/abstract=3717762 or http://dx.doi.org/10.2139/ssrn.3717762

Zachary Wojtowicz (Contact Author)

Harvard Graduate School of Arts and Sciences ( email )

Littauer Center
1805 Cambridge Street
Cambridge, MA 02138
United States

Harvard Business School ( email )

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