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

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  • Paola Manzini

    (Queen Mary, University of London and IZA)

  • Marco Mariotti

    (Queen Mary, University of London)

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 Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 561.

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Date of creation: Jul 2006
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Handle: RePEc:qmw:qmwecw:wp561

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Keywords: Bounded rationality; Choice experiments;

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References

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  1. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  2. Ariel Rubinstein, 2000. "Is It 'Economics and Psychology?' : The Case of Hyperbolic Discounting," Levine's Working Paper Archive 7640, David K. Levine.
  3. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Philippe Fevrier & Michael Visser, 2000. "A Study of Consumer Behavior Using Laboratory Data," Econometric Society World Congress 2000 Contributed Papers 1095, Econometric Society.
  5. 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.
  6. Sen, Amartya, 1993. "Internal Consistency of Choice," Econometrica, Econometric Society, vol. 61(3), pages 495-521, May.
  7. 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.
  8. 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.
  9. Paola Manzini & Marco Mariotti & Luigi Mittone, 2010. "Choosing monetary sequences: theory and experimental evidence," Theory and Decision, Springer, vol. 69(3), pages 327-354, September.
  10. James Andreoni & William T. Harbaugh, 2006. "Power Indices for Revealed Preference Tests," Levine's Bibliography 122247000000001257, UCLA Department of Economics.
  11. 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.
  12. Amartya Sen, 1996. "Maximization and the Act of Choice," Harvard Institute of Economic Research Working Papers 1766, Harvard - Institute of Economic Research.
  13. Daniel Read, 2005. "Monetary incentives, what are they good for?," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(2), pages 265-276.
  14. 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.
  15. James Andreoni, 2001. "Giving According to GARP," Theory workshop papers 339, UCLA Department of Economics.
  16. 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.
  17. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
  18. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
  19. Ariel Rubinstein & Yuval Salant, 2006. "Two Comments on the Principle of Revealed Preference," Levine's Bibliography 321307000000000272, UCLA Department of Economics.
  20. 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.
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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. Kfir Eliaz & Michael Richter & Ariel Rubinstein, 2011. "Choosing the two finalists," Economic Theory, Springer, vol. 46(2), pages 211-219, February.
  3. Michele Lombardi, 2007. "Reason-Based Choice Correspondences," Working Papers 607, Queen Mary, University of London, School of Economics and Finance.

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