Procedural Analysis of Choice Rules with Applications to Bounded Rationality
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)
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Volume (Year): 101 (2011)
Issue (Month): 2 (April)
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- 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.
- Kalai, Gil, 2003. "Learnability and rationality of choice," Journal of Economic Theory, Elsevier, vol. 113(1), pages 104-117, November.
- Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.