Boundedly Rational Expected Utility Theory

40 Pages Posted: 1 Aug 2017

See all articles by Daniel Navarro‐Martinez

Daniel Navarro‐Martinez

Universitat Pompeu Fabra

Graham Loomes

University of Warwick

Andrea Isoni

University of Warwick - Warwick Business School

David Butler

Murdoch University

Larbi Alaoui

Universitat Pompeu Fabra - Department of Economics and Business

Date Written: June 15, 2017

Abstract

We build a satisficing model of probabilistic choice under risk which embeds Expected Utility Theory (EUT) into a boundedly rational deliberation process. The decision maker accumulates evidence for and against alternative options by repeatedly sampling from her underlying set of EU preferences until the evidence favouring one option satisfies her desired level of confidence. Notwithstanding its EUT core, the model produces patterns of behaviour that violate standard axioms, while at the same time capturing the systematic relationship between choice probabilities, response times and confidence judgments, which is beyond the scope of theories that do not take deliberation into account.

Keywords: Expected Utility; Bounded Rationality; Deliberation; Probabilistic Choice; Confidence; Response Times

JEL Classification: D03; D81

Suggested Citation

Navarro‐Martinez, Daniel and Loomes, Graham and Isoni, Andrea and Butler, David and Alaoui, Larbi, Boundedly Rational Expected Utility Theory (June 15, 2017). Available at SSRN: https://ssrn.com/abstract=3010289 or http://dx.doi.org/10.2139/ssrn.3010289

Daniel Navarro‐Martinez

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Graham Loomes

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Andrea Isoni (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

David Butler

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

Larbi Alaoui

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

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