Regions of Rationality: Maps for Bounded Agents

UPF Economics and Business Working Paper 828

57 Pages Posted: 29 Nov 2005

See all articles by Robin M. Hogarth

Robin M. Hogarth

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Natalia Karelaia

INSEAD - Decision Sciences

Date Written: May 20, 2005

Abstract

An important problem faced by boundedly rational agents is to identify 'regions of rationality,' i.e., the areas for which simple, boundedly rational models are and are not effective. To map the contours of such regions, we derive probabilities that models identify the best of m alternatives (m > 2) characterized by k attributes (k > 1). The models include a single variable (lexicographic), variations of elimination-by-aspects, equal weighting, hybrids of the preceding, and models exploiting dominance. We compare all with multiple regression. We illustrate the theory with twenty simulated and four empirical datasets. Fits between predictions and realizations are excellent. However, the terrain mapped by our work is complex and no single model is 'best.' We further provide an overview by regressing the performance of the different models on factors characterizing environments. We conclude with suggestions for further research as well as implications for the concept of rationality in economics.

Keywords: Decision making, Bounded rationality, Lexicographic rules, Choice theory

JEL Classification: D81, M10

Suggested Citation

Hogarth, Robin M. and Karelaia, Natalia, Regions of Rationality: Maps for Bounded Agents (May 20, 2005). UPF Economics and Business Working Paper 828, Available at SSRN: https://ssrn.com/abstract=859304 or http://dx.doi.org/10.2139/ssrn.859304

Robin M. Hogarth (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34 93 542 2561 (Phone)
34 93 542 1746 (Fax)

Natalia Karelaia

INSEAD - Decision Sciences ( email )

United States

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