Bounded rationality asasource of loss aversion and optimism

Jing Yao

Duan Li

We develop a formal model to investigate the implications of bounded rationality for the origin and structure of loss aversion and optimism in market places.Based on Simon’s original description,we explicitly model bounded rationality as a decision mechanism that captures incomplete information,psychological daptation,and rational behavior.We find that the endogenous loss aversion and optimism emerge when the degree of information incompleteness reaches a certain threshold,and both grow to be more prominent when information becomes sparser.Our result shigh light that the psychological biases could be expected to take advantage of perceived information incompleteness in terms of value creation.