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Procedural Analysis of Choice Rules with Applications to Bounded Rationality

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  • Yuval Salant

Abstract

I study how limited abilities to process information affect choice behavior. I model the decision-making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of states an automaton implementing the rule uses to process information. I establish that any choice rule that is less complicated than utility maximization displays framing effects. I then prove that choice rules that result from an optimal trade-off between maximizing utility and minimizing complexity are history-dependent satisficing procedures that display primacy and recency effects. (JEL D01, D03, D11, D83)

Suggested Citation

  • Yuval Salant, 2011. "Procedural Analysis of Choice Rules with Applications to Bounded Rationality," American Economic Review, American Economic Association, vol. 101(2), pages 724-748, April.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:724-48
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    References listed on IDEAS

    as
    1. Taradas Bandyopadhyay, 1988. "Revealed Preference Theory, Ordering and the Axiom of Sequential Path Independence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 343-351.
    2. Kalai, Gil, 2003. "Learnability and rationality of choice," Journal of Economic Theory, Elsevier, vol. 113(1), pages 104-117, November.
    3. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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