A Boundedly Rational Decision Algorithm

Cognition requires scarce inputs, including time and concentration. Since cognition is costly, sophisticated decision-makers should use mental shortcuts, or heuristics, to reduce cognitive burdens. A model is proposed and tested that is motivated by these principles. It is believed this model achiev...

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Published inThe American economic review Vol. 90; no. 2; pp. 433 - 438
Main Authors Gabaix, Xavier, Laibson, David
Format Journal Article
LanguageEnglish
Published Menasha, Wis American Economic Association 01.05.2000
Subjects
Online AccessGet full text
ISSN0002-8282
1944-7981
DOI10.1257/aer.90.2.433

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Abstract Cognition requires scarce inputs, including time and concentration. Since cognition is costly, sophisticated decision-makers should use mental shortcuts, or heuristics, to reduce cognitive burdens. A model is proposed and tested that is motivated by these principles. It is believed this model achieves four goals. First, the model makes quantitative behavioral predictions and, hence, provides a precise alternative to the rational-actor hypothesis. Second, the model is psychologically plausible because it is based on the actual decisions algorithms that subjects claim to use. Third, the model is empirically testable; such a test is provided in this paper. Fourth, the model is broadly applicable, because it can be used to analyze decision problems that can be represented in tree form.
AbstractList Cognition requires scarce inputs, including time and concentration. Since cognition is costly, sophisticated decision-makers should use mental shortcuts, or heuristics, to reduce cognitive burdens. A model is proposed and tested that is motivated by these principles. It is believed this model achieves four goals. First, the model makes quantitative behavioral predictions and, hence, provides a precise alternative to the rational-actor hypothesis. Second, the model is psychologically plausible because it is based on the actual decisions algorithms that subjects claim to use. Third, the model is empirically testable; such a test is provided in this paper. Fourth, the model is broadly applicable, because it can be used to analyze decision problems that can be represented in tree form.
Author Gabaix, Xavier
Laibson, David
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Cites_doi 10.1111/1468-0262.00054
10.2307/1884852
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SubjectTerms Algorithms
Cognition
Cognition & reasoning
Cognitive models
Decision making
Decision trees
Discounting
Economic models
Economic theory
Expected values
Experimental data
Game theory
Heuristic
Heuristics
Modeling
Preferences, Behavior, and Welfare
Rationality
Studies
Title A Boundedly Rational Decision Algorithm
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