Theory/Experimental Seminar - Maurício Ribeiro (Bristol)

Abstract: This paper introduces a natural criterion to rank the incompatibility of observed choices with rational choice, that is, with choices generated by preference maximization. Whereas previous approaches use indices to assess this incompatibility, the basic criterion introduced here leads to an incomplete rationality ordering, which captures the severity of the departure from rational choice in several models of boundedly rational choice. Despite its incompleteness, no index of incompatibility (that I am aware of) fully agrees with it. I characterize when an index would do so using a particular notion of predictive error of the preference maximization model. I then propose a method to build indices of incompatibility that agree with the rationality ordering and use it to define two new indices of incompatibility, one of them based on the well-known Houtman-Maks index. As an empirical application, I compare to what extent these two indices and the rationality ordering disagree with existing indices of incompatibility in assessing the rationality of choices in an earlier choice elicitation experiment.

Location: 118 Chandler House or Zoom

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