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On the meaning of the Critical Cost Efficiency Index

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  • Federico Echenique

Abstract

This note provides a critical discussion of the \textit{Critical Cost-Efficiency Index} (CCEI) as used to assess deviations from utility-maximizing behavior. I argue that the CCEI is hard to interpret, and that it can disagree with other plausible measures of "irrational" behavior. The common interpretation of CCEI as wasted income is questionable. Moreover, I show that one agent may have more unstable preferences than another, but seem more rational according to the CCEI. This calls into question the (now common) use of CCEI as an ordinal and cardinal measure of degrees of rationality.

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  • Federico Echenique, 2021. "On the meaning of the Critical Cost Efficiency Index," Papers 2109.06354, arXiv.org, revised Apr 2022.
    • Handle: RePEc:arx:papers:2109.06354
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    References listed on IDEAS

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    1. Chambers,Christopher P. & Echenique,Federico, 2016. "Revealed Preference Theory," Cambridge Books, Cambridge University Press, number 9781107087804.
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    6. Roy Allen & John Rehbeck, 2021. "Measuring rationality: percentages vs expenditures," Theory and Decision, Springer, vol. 91(2), pages 265-277, September.
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    8. Landsburg, Steven E, 1981. "Taste Change in the United Kingdom, 1900-1955," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 92-104, February.
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    10. Matej Opatrny, 2018. "Extent of Irrationality of the Consumer: Combining the Critical Cost Eciency and Houtman Maks Indices," Working Papers IES 2018/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2018.
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    Cited by:

    1. Lasse Mononen, 2023. "Computing and comparing measures of rationality," ECON - Working Papers 437, Department of Economics - University of Zurich.

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