Christos A. Ioannou

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Algorithmic Bounded Rationality, Optimality And Noise

Abstract - A model of learning, adaptation and innovation is used to simulate the evolution of Moore machines(executing strategies) in the repeated Prisoner's Dilemma stage-game. In contrast to previous simulations that assumed perfect informational and implementation accuracy, the agents' machines are prone to two types of errors:(a) action-implementation errors, and (b) perception errors. The impact of bounded rationality on the agents' machines is examined under different error-levels. The computations indicate that the incorporation of bounded rationality is sufficient to alter the evolutionary structure of the agents' machines. In particular, the evolution of cooperative machines becomes less likely as the likelihood of errors increases.

[Paper]

 

Instead of a world of near-identical actors, coolly assessing their economic interests and acting with clear-eyed precision, he sees a world (and markets) governed by passion, bias and self-reinforcing errors. Because fallible human beings are both involved in, and trying to make sense of this world, they inevitably make mistakes. Those mistakes then feed on themselves in reflexive ways that, when taken to extremes, result in situations such as the now-deflating U.S. housing bubble.

Excerpt from the Man Who Would Be A Philosopher King; George Soros
USA Today, May 13, 2008.
 

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Email: ioannou@umn.edu