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- Title
Bounded arbitrage and nearly rational behavior.
- Authors
Nascimento, Leandro
- Abstract
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.
- Subjects
ARBITRAGE; PROBABILITY measures
- Publication
Economic Theory, 2024, Vol 77, Issue 4, p941
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-023-01515-y