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Procedural Analysis of Choice Rules with Applications to Bounded Rationality

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  • Yuval Salant

Abstract

I study how limited abilities to process information affect choice behavior. I model the decision-making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of states an automaton implementing the rule uses to process information. I establish that any choice rule that is less complicated than utility maximization displays framing effects. I then prove that choice rules that result from an optimal trade-off between maximizing utility and minimizing complexity are history-dependent satisficing procedures that display primacy and recency effects. (JEL D01, D03, D11, D83)

Suggested Citation

  • Yuval Salant, 2011. "Procedural Analysis of Choice Rules with Applications to Bounded Rationality," American Economic Review, American Economic Association, vol. 101(2), pages 724-748, April.
  • Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:724-48
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.2.724
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    References listed on IDEAS

    as
    1. Taradas Bandyopadhyay, 1988. "Revealed Preference Theory, Ordering and the Axiom of Sequential Path Independence," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 343-351.
    2. Kalai, Gil, 2003. "Learnability and rationality of choice," Journal of Economic Theory, Elsevier, vol. 113(1), pages 104-117, November.
    3. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
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    Citations

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    Cited by:

    1. Jones, Matthew T., 2014. "Strategic complexity and cooperation: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 352-366.
    2. Guney, Begum, 2014. "A theory of iterative choice in lists," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 26-32.
    3. Dinko Dimitrov & Saptarshi Mukherjee & Nozomu Muto, 2013. "List-based decision problems," UFAE and IAE Working Papers 927.13, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Muto, Nozomu, 2014. "Strategic complexity in repeated extensive games," Games and Economic Behavior, Elsevier, vol. 83(C), pages 45-52.
    5. repec:the:publsh:1769 is not listed on IDEAS
    6. Novarese, Marco & Wilson, Chris M., 2013. "Being in the Right Place: A Natural Field Experiment on List Position and Consumer Choice," MPRA Paper 48074, University Library of Munich, Germany.
    7. repec:eee:jbrese:v:82:y:2018:i:c:p:127-140 is not listed on IDEAS
    8. Brenčič, Vera, 2014. "Search online: Evidence from acquisition of information on online job boards and resume banks," Journal of Economic Psychology, Elsevier, vol. 42(C), pages 112-125.
    9. Venkatraman, Vinod & Payne, John W. & Huettel, Scott A., 2014. "An overall probability of winning heuristic for complex risky decisions: Choice and eye fixation evidence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 125(2), pages 73-87.
    10. Itai Ater & Eugene Orlov, 2013. "The Effect of the Internet on Performance and Quality: Evidence from the Airline Industry," Working Papers 13-07, NET Institute.
    11. Dinko Dimitrov & Saptarshi Mukherjee & Nozomu Muto, 2016. "‘Divide-and-choose’ in list-based decision problems," Theory and Decision, Springer, vol. 81(1), pages 17-31, June.
    12. Hiroki Nishimura, 2014. "The Transitive Core: Inference of Welfare from Nontransitive Preference Relations," Working Papers 201419, University of California at Riverside, Department of Economics.
    13. Hennlock, Magnus & Löfgren, Åsa & Wollbrant, Conny, 2017. "Prices versus Standards and Firm Behavior: Evidence from an Artefactual Field Experiment," Working Papers in Economics 687, University of Gothenburg, Department of Economics, revised Nov 2017.

    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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