Paper #828

Title:

Regions of rationality: Maps for bounded agents

Authors:

Robin Hogarth and Natalia Karelaia

Date:

April 2005 (Revised: March 2006)

Abstract:

An important problem in descriptive and prescriptive research in decision making is to identify “regions of rationality,” i.e., the areas for which heuristics are and are not effective. To map the contours of such regions, we derive probabilities that heuristics identify the best of m alternatives (m > 2) characterized by k attributes or cues (k > 1). The heuristics include a single variable (lexicographic), variations of elimination-by-aspects, equal weighting, hybrids of the preceding, and models exploiting dominance. We use twenty simulated and four empirical datasets for illustration. We further provide an overview by regressing heuristic performance on factors characterizing environments. Overall, “sensible” heuristics generally yield similar choices in many environments. However, selection of the appropriate heuristic can be important in some regions (e.g., if there is low inter-correlation among attributes/cues). Since our work assumes a “hit or miss” decision criterion, we conclude by outlining extensions for exploring the effects of different loss functions.

Keywords:

Decision making, Bounded rationality, Lexicographic rules, Choice theory, Leex

JEL codes:

D81, M10

Area of Research:

Behavioral and Experimental Economics

Published in:

Decision Analysis, 3(3), 124-144, 2006

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