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.
Highlights
Economics is often said to be the study of the allocation of scarce resources, of how human beings decide to combine their time and skills with physical resources to produce, distribute and consume
What we try to capture is the idea that when the choice is initially presented—i.e., before any deliberation has occurred—it is as if the decision makers (DMs) starts with the null hypothesis that there is no significant difference between the subjective values of the two options
In this subsection we show that Boundedly Rational Expected Utility Theory (BREUT) is consistent with weak stochastic transitivity (WST)—i.e., the only instances of violations of WST will be due to random variation rather than to any systematic underlying tendency—but it allows systematic violations of stochastic transitivity (SST) of the kinds that have been documented
Summary
Economics is often said to be the study of the allocation of scarce resources, of how human beings decide to combine their time and skills with physical resources to produce, distribute and consume. Stimulated by experimental data that appeared to violate basic axioms of rational choice, a number of models appeared at the end of the 1970s and in the early 1980s that sought to provide behavioural alternatives to standard Expected Utility Theory (EUT)—see Starmer (2000) for a review These were deterministic models that relaxed a particular axiom and/or incorporated various additional features—e.g., reference points, loss aversion, probability weighting, regret, disappointment—to try to account for certain regularities in observed decisions. While such models provided more elaborate descriptive theories of choice, little or no consideration was given to the mental constraints referred to by Simon. Some theorems and their proofs can be found in the online appendix
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