Are Business Management Games a Suitable Tool for Analyzing the Boundedly Rational Behavior of Economic Agents?

Abstract

Regulatory policies often aim to steer the behavior of economic agents by changing their economic environment. Assessing the potential impacts of regulatory policies requires forecasts regarding how humans adapt to such changes. One important prerequisite for meaningful policy impact analysis is in-depth knowledge of why and to what extent economic agents behave in a boundedly rational way. We propose that business management games can be used to contribute towards better understanding of agent behaviors, since they provide an inexpensive opportunity to reach beyond existing anecdotal evidence concerning “behavioral anomalies”. Modifying an existing business management game in which investment, financing and produc tion decisions have to be made, we demonstrate how bounded rationality can be quantified and separated into its two components: incomplete information and limited cognitive abilities. The resulting data show that decisions made by participants in this game are strongly influenced by bounded rationality. They also show that both incomplete information and limited cognitive abilities are relevant components of the bounded rationality displayed by players.