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Thinking Ahead: The Decision Problem

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  • Patrick Bolton
  • Antoine Faure-Grimaud
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    Abstract

    We propose a model of costly decision making based on time-costs of deliberating current and future decisions. We model an individual decision-maker's thinking process as a thought-experiment that takes time, and lets the decision maker 'think ahead' about future decision problems in yet unrealized states of nature. By formulating an intertemporal, state-contingent, planning problem which may involve costly deliberation in every state of nature, and by letting the decision maker deliberate ahead of the realization of a state, we attempt to capture the basic observation that individuals generally do not think through a complete action plan. Instead, individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise. Copyright 2009, Wiley-Blackwell.

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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00554.x
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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Review of Economic Studies.

    Volume (Year): 76 (2009)
    Issue (Month): 4 ()
    Pages: 1205-1238

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    Handle: RePEc:oup:restud:v:76:y:2009:i:4:p:1205-1238

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    4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
    5. Lipman, Barton L, 1999. "Decision Theory without Logical Omniscience: Toward an Axiomatic Framework for Bounded Rationality," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 339-61, April.
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    7. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
    8. Lipman, Barton L, 1991. "How to Decide How to Decide How to. . . : Modeling Limited Rationality," Econometrica, Econometric Society, vol. 59(4), pages 1105-25, July.
    9. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, vol. 96(2), pages 164-169, May.
    10. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
    11. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
    12. Reis, Ricardo, 2005. "Inattentive Consumers," CEPR Discussion Papers 5053, C.E.P.R. Discussion Papers.
    13. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    14. Radner, Roy & Rothschild, Michael, 1975. "On the allocation of effort," Journal of Economic Theory, Elsevier, vol. 10(3), pages 358-376, June.
    15. Patrick Bolton & Antoine Faure-Grimaud, 2009. "Satisficing Contracts," NBER Working Papers 14654, National Bureau of Economic Research, Inc.
    16. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
    17. Conlisk, John, 1988. "Optimization cost," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 213-228, April.
    18. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
    19. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
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    Cited by:
    1. Andrew Caplin & Daniel J. Martin, 2012. "Defaults and Attention: The Drop Out Effect," NBER Working Papers 17988, National Bureau of Economic Research, Inc.
    2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    3. Binswanger, Johannes, 2011. "Dynamic decision making with feasibility goals: A procedural-rationality approach," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 219-228, May.
    4. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, vol. 66(1), pages 45-64.
    5. Philippe Aghion & Richard Holden, 2011. "Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?," Journal of Economic Perspectives, American Economic Association, vol. 25(2), pages 181-97, Spring.

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