The first serious chapter on modelling covers human actors.

There are two general approaches to modelling a human actor.

a) The Rational Actor Model

Modelling human actors as being rational has come under a lot of criticism but no other model has the kind of consistency and elegance offered by this approach. By making an assumption that a person will act rationally, you can also come up with behaviour that approximates that of a highly intelligent player.

In the Rational Actor model, individuals choose the action that maximises their payoff. This pre-supposes that a payoff function is defined over a set of possible actions. If an investor is rational, between an investment that generates 10% and 12% but with the same semi-variance, the investor will choose the latter strategy.

Upon further inspection, you will realise that most human beings are hardly rational. One component of rationality is that ability to consider all options. All