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American Economic Review: Vol. 101 No. 2 (April 2011)

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Procedural Analysis of Choice Rules with Applications to Bounded Rationality

Article 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

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)

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Authors

Salant, Yuval (Northwestern U)

JEL Classifications

D01: Microeconomic Behavior: Underlying Principles
D03: Behavioral Economics: Underlying Principles
D11: Consumer Economics: Theory
D83: Search; Learning; Information and Knowledge; Communication; Belief


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