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Order-k Rationality

Author

Listed:
  • Salvador Barber‡
  • Geoffroy de Clippel
  • Alejandro Neme
  • Kareen Rozen

Abstract

A decision maker (DM) may not perfectly maximize her preference over the feasible set. She may feel it is good enough to maximize her preference over a sufficiently large consideration set; or just require that her choice is sufficiently well-ranked (e.g., in the top quintile of options); or even endogenously determine a threshold for what is good enough, based on an initial sampling of the options. Heuristics such as these are all encompassed by a common theory of Order-k Rationality, which relaxes perfect optimization by only requiring choices from a set S to fall within the set's top k(S) elements according to the DM's preference ordering. Heuristics aside, this departure from rationality offers a natural way, in the classic 'as if' tradition, to gradually accommodate more choice patterns as k increases. We characterize the empirical content of Order-k Rationality (and related theories), and provide a tractable testing method which is comparable to the method of checking SARP.

Suggested Citation

  • Salvador Barber‡ & Geoffroy de Clippel & Alejandro Neme & Kareen Rozen, 2020. "Order-k Rationality," Working Papers 2020-10, Brown University, Department of Economics.
    • Handle: RePEc:bro:econwp:2020-10
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    References listed on IDEAS

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