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Two-Stage Boundedly Rational Choice Procedures: Theory and Experimental Evidence

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Author Info

  • Manzini, Paola

    ()
    (University of St. Andrews)

  • Mariotti, Marco

    ()
    (University of St. Andrews)

Abstract

We study and test a class of boundedly rational models of decision making which rely on sequential eliminative heuristics. We formalize two sequential decision procedures, both inspired by plausible models popular among several psychologists and marketing scientists. However we follow a standard ‘revealed preference’ economic approach by fully characterizing these procedures by few, simple and testable conditions on observed choice. Then we test the models (as well as the standard utility maximization model) with experimental data. We find that the large majority of individuals behave in a way consistent with one of our procedures, and inconsistent with the utility maximization model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2341.

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Length: 69 pages
Date of creation: Sep 2006
Date of revision:
Publication status: published online as 'Categorize Then Choose: Boundedly Rational Choice and Welfare' in: Journal of the European Economic Association, 2012, {Early View]
Handle: RePEc:iza:izadps:dp2341

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Keywords: bounded rationality; choice experiments;

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References

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  1. Daniel Read, 2005. "Monetary incentives, what are they good for?," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(2), pages 265-276.
  2. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
  3. Rubinstein, A., 2000. "Is it "Economics and Psychology"?: the Case of Hyperbolic Discounting," Papers 2000-21, Tel Aviv.
  4. William T. Harbaugh & Kate Krause & Timothy R. Berry, 2001. "GARP for Kids: On the Development of Rational Choice Behavior," American Economic Review, American Economic Association, vol. 91(5), pages 1539-1545, December.
  5. Gil Kalai & Ariel Rubinstein & Ran Spiegler, 2001. "Rationalizing Choice Functions by Multiple Rationales," Discussion Paper Series dp278, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  6. Sen, Amartya, 1993. "Internal Consistency of Choice," Econometrica, Econometric Society, vol. 61(3), pages 495-521, May.
  7. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  8. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
  9. James Andreoni, 2001. "Giving According to GARP," Theory workshop papers 339, UCLA Department of Economics.
  10. Ariel Rubinstein, 2003. ""Economics and Psychology"? The Case of Hyperbolic Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1207-1216, November.
  11. Paola Manzini & Marco Mariotti & Luigi Mittone, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," Working Papers 562, Queen Mary, University of London, School of Economics and Finance.
  12. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
  13. John List & Craig Gallet, 2001. "What Experimental Protocol Influence Disparities Between Actual and Hypothetical Stated Values?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(3), pages 241-254, November.
  14. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  15. Philippe Fevrier & Michael Visser, 2000. "A Study of Consumer Behavior Using Laboratory Data," Econometric Society World Congress 2000 Contributed Papers 1095, Econometric Society.
  16. Ariel Rubinstein & Yuval Salant, 2006. "Two Comments on the Principle of Revealed Preference," Levine's Bibliography 321307000000000272, UCLA Department of Economics.
  17. Andreoni,J. & Harbaugh,W.T., 2005. "Power indices for revealed preference tests," Working papers 10, Wisconsin Madison - Social Systems.
  18. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  19. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
  20. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
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Cited by:
  1. Manzini, Paola & Mariotti, Marco & Mittone, Luigi, 2006. "Choosing Monetary Sequences: Theory and Experimental Evidence," IZA Discussion Papers 2129, Institute for the Study of Labor (IZA).
  2. Michele Lombardi, 2007. "Reason-Based Choice Correspondences," Working Papers 607, Queen Mary, University of London, School of Economics and Finance.
  3. Kfir Eliaz & Michael Richter & Ariel Rubinstein, 2011. "Choosing the two finalists," Economic Theory, Springer, vol. 46(2), pages 211-219, February.

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