research institute for compassionate economics

Bounded Rationality as Subjective Menus: Contraction Consistency and Intertemporal Choice

Dean Spears, on September 29th, 2009
How would a boundedly rational agent react to a larger menu? I model bounded rationality as choice from an unobservable, subjective consideration subset. Consideration sets satisfy Sen’s (1969) property alpha: larger objective choice sets can generate smaller consideration sets. In a single-period model, the “weak weak axiom of revealed preference” is represented by such choice; contraction consistency underlies two recent representations of this axiom. The main contribution is a representation of intertemporal choice: sets are as valuable as their subjective subsets. Applications suggest that bounded rationality could explain some phenomena often ascribed to behavioral preferences, including some apparent impatience.

 

Download Published: B.E. Journal of Economic Analysis and Policy       Geography: International