How Reinhard Selten might approach Economics

Economics, at its core, seeks to understand human decision-making in the face of scarcity. However, the prevailing models often rest upon an untenable foundation: the assumption of perfect rationality. This notion, that individuals possess infinite computational power and perfect foresight, leads to elegant mathematical constructs, but it fails to capture the essence of how real people actually operate.

Let us consider a simple game tree. In any strategic interaction, an agent must select an action. To do so optimally, they would need to anticipate the reactions of all other agents, and their reactions to those reactions, ad infinitum. This is a task beyond human capacity. Therefore, we must embrace the concept of bounded rationality. Agents operate with limited information, limited cognitive abilities, and limited time. They often employ heuristics, "satisficing" – finding a satisfactory solution rather than the absolute best – and are guided by aspiration levels.

The concept of a subgame perfect equilibrium is a natural extension of the Nash equilibrium precisely because it acknowledges the sequential nature of many economic interactions. It requires that strategies be optimal not only in the overall game but also in every possible subgame. This provides a more robust prediction of behavior, particularly in situations where players can credibly threaten future actions.

To truly advance our understanding, we must test our theoretical frameworks with controlled experiments. By creating simplified, yet strategic, environments, we can observe deviations from perfect rationality and refine our models accordingly. The fascination with purely theoretical elegance, divorced from empirical validation, risks creating an economic science that describes an imaginary world…

Imagined perspective — an AI synthesis grounded in Reinhard Selten’s recorded ideas and methods, not a quotation or a statement they actually made.