Probabilistic Representation of Complexity

Posted: 21 Aug 2002

See all articles by Nabil I. Al-Najjar

Nabil I. Al-Najjar

Northwestern University - Kellogg School of Management

Ramon Casadesus-Masanell

Harvard University - Strategy Unit

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

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Abstract

We study individuals' behavior in an environment that is deterministic, but too complex to permit tractable deterministic representation. Under mild conditions, behavior is represented by a unique probabilistic model in which the agent's inability to think through all contingencies of the problem translates into uncertainty about random states. We interpret this probabilistic model as embodying all patterns the agent perceives in his environment, yet allowing for the possibility that there may be important details he had missed. The implied behavior is rational in the traditional sense, yet consistent with an agent who believes his environment is too complex to warrant precise planing, foregoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility.

Keywords: Complexity, Categorization, Employment Relationship, Agency, Pettis Integral, Behavior, Behavioral Foundation, Decision Making, Uncertainty, Bounded Rationality, Incomplete Contracts, Discretization, Features, Instances

JEL Classification: D00, D81, D83

Suggested Citation

Al-Najjar, Nabil I. and Casadesus-Masanell, Ramon and Ozdenoren, Emre, Probabilistic Representation of Complexity. Available at SSRN: https://ssrn.com/abstract=325042

Nabil I. Al-Najjar

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5426 (Phone)
847-467-1220 (Fax)

Ramon Casadesus-Masanell (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-496-0176 (Phone)
617-496-5859 (Fax)

HOME PAGE: http://www.people.hbs.edu/rmasanell

Emre Ozdenoren

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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