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Subjective Representation of Complexity

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Author Info

  • Nabil I. Al-Najjar
  • Ramon Casadesus-Masanell
  • Emre Ozdenoren

Abstract

We study how individuals cope with the complexity of their environment by developing subjective models, or representations, to guide their predictions and decisions. Formally, an individual who believes his environment is deterministic, but too complex to permit tractable deterministic representation, builds a probablistic model embodying perceived regularities of that environment. In this model, the individual's inability to think through all possible instances of the problem is represented by an uncertainty about random states. The resulting behavior is fully rational in the traditional sense, yet consistent with an agent who believes his environment is too complex to warrant precise planing, forgoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility. We consider applications to time-inconsistent preferences, delegation, and two-player simultaneous games.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1249.

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Date of creation: Jan 1999
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Handle: RePEc:nwu:cmsems:1249

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Phone: 847/491-3527
Fax: 847/491-2530
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
  2. Gilboa Itzhak & Schmeidler David, 1994. "Infinite Histories and Steady Orbits in Repeated Games," Games and Economic Behavior, Elsevier, vol. 6(3), pages 370-399, May.
  3. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Asheim, Geir B, 1997. "Individual and Collective Time-Consistency," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 427-43, July.
  5. Itzhak Gilboa & David Schmeidler, 1992. "Case-Based Decision Theory," Discussion Papers 994, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Barton L. Lipman, 1995. "Information Processing and Bounded Rationality: A Survey," Canadian Journal of Economics, Canadian Economics Association, vol. 28(1), pages 42-67, February.
  7. Dekel, Eddie & Lipman, Barton L. & Rustichini, Aldo, 1998. "Recent developments in modeling unforeseen contingencies," European Economic Review, Elsevier, vol. 42(3-5), pages 523-542, May.
  8. 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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Cited by:
  1. Andreas Ramsauer, 1999. "Heterogeneous Discount Factors in an Assignment Model with Search Frictions," Vienna Economics Papers 9807, University of Vienna, Department of Economics.

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