Show simple item record

Files in this item

Thumbnail

Item metadata

dc.contributor.authorDiasakos, Theodoros
dc.date.accessioned2013-10-16T14:31:02Z
dc.date.available2013-10-16T14:31:02Z
dc.date.issued2013-10
dc.identifier.citationDiasakos , T 2013 ' Complexity and bounded rationality in individual decision problems ' School of Economics & Finance Discussion Paper 1314 , no. 1314 , University of St Andrews .en
dc.identifier.issn0962-4031
dc.identifier.otherPURE: 38221037
dc.identifier.otherPURE UUID: b882a0c9-3692-4200-b26e-05f2eef29862
dc.identifier.urihttps://hdl.handle.net/10023/4088
dc.description.abstractI develop a model of endogenous bounded rationality due to search costs, arising implicitly from the problem's complexity. The decision maker is not required to know the entire structure of the problem when making choices but can think ahead, through costly search, to reveal more of it. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through her choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the benefits of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. For a fixed decision problem, the costs of search will vary across agents. For a given decision maker, they will vary across problems. The model explains, therefore, why the disparity, between observed choices and those prescribed under rationality, varies across agents and problems. It also suggests, under reasonable assumptions, an identifying prediction: a relation between the benefits of deeper search and the depth of the search. As long as calibration of the search costs is possible, this can be tested on any agent-problem pair. My approach provides a common framework for depicting the underlying limitations that force departures from rationality in different and unrelated decision-making situations. Specifically, I show that it is consistent with violations of timing independence in temporal framing problems, dynamic inconsistency and diversification bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk attitudes across small- and large-stakes gambles.
dc.format.extent65
dc.language.isoeng
dc.publisherUniversity of St Andrews
dc.relation.ispartofseriesSchool of Economics & Finance Discussion Paper 1314en
dc.rights(c) 2013 the authoren
dc.subjectHG Financeen
dc.subject.lccHGen
dc.titleComplexity and bounded rationality in individual decision problemsen
dc.typeWorking or discussion paperen
dc.description.versionPostprinten
dc.contributor.institutionUniversity of St Andrews. School of Economics and Financeen
dc.identifier.urlhttp://ideas.repec.org/p/san/wpecon/1314.htmlen
dc.identifier.urlhttp://www.st-andrews.ac.uk/economics/repecfiles/4/1314.pdfen


This item appears in the following Collection(s)

Show simple item record