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Subjective Representation of Complexity

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  • 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.

Suggested Citation

  • Nabil I. Al-Najjar & Ramon Casadesus-Masanell & Emre Ozdenoren, 1999. "Subjective Representation of Complexity," Discussion Papers 1249, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1249
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    References listed on IDEAS

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    4. 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.
    5. Geir B. Asheim, 1997. "Individual and Collective Time-Consistency," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 427-443.
    6. Luca Anderlini & Leonardo Felli, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1085-1124.
    7. 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.
    8. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    9. Barton L. Lipman, 1999. "Decision Theory without Logical Omniscience: Toward an Axiomatic Framework for Bounded Rationality," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 339-361.
    10. 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.
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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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