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  3. American Economic Review
  4. April 2011
  5. Procedural Analysis of Choice Rules with Applications to Bounded Rationality

Procedural Analysis of Choice Rules with Applications to Bounded Rationality

  • Yuval Salant
American Economic Review
vol. 101, no. 2, April 2011
(pp. 724-48)
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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)

Citation

Salant, Yuval. 2011. "Procedural Analysis of Choice Rules with Applications to Bounded Rationality." American Economic Review, 101 (2): 724-48. DOI: 10.1257/aer.101.2.724

JEL Classification

  • D01 Microeconomic Behavior: Underlying Principles
  • D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
  • D11 Consumer Economics: Theory
  • D83 Search; Learning; Information and Knowledge; Communication; Belief