Procedural Analysis of Choice Rules with Applications to Bounded Rationality
American Economic Review · 2011 · Volume 101 · Issue 2
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)
Keywords
Microeconomic Behavior: Underlying Principles, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Consumer Economics: Theory, Search, Learning, Information and Knowledge, Communication, Belief
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