Procedural Analysis of Choice Rules with Applications to Bounded Rationality

I study how limited abilities to process information affect choice behavior. I model the decision making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of categories an automaton implementing the rule uses to process information. I establish that any choice rule that is less complicated than utility maximization displays framing effects. I then prove that the unique choice rule that results from an optimal tradeoff between maximizing utility and minimizing complexity is a history-dependent satisficing procedure that displays primacy and recency effects, default tendency and choice overload. ∗I am indebted to Bob Wilson for his devoted guidance, constant support, and most valuable suggestions. I am grateful to Ariel Rubinstein and Jeremy Bulow for the encouragement, productive discussions, and important comments. I thank Gil Kalai, Ron Siegel, and Andy Skrzypacz for most insightful feedback in various stages of this project. I also thank Matt Jackson, Jon Levin, Michael Ostrovsky, Roy Radner, Ilya Segal, and seminar participants at UC Berkeley, Brown, Caltech, Harvard, Hebrew University, Iowa, LSE, MIT, Northwestern, NYU, Stanford, Tel-Aviv, UCL, Washington University in St. Louis, and Yale for helpful comments. This research is supported in part by the Leonard W. and Shirley R. Ely Fellowship of the Stanford Institute for Economic Policy Research.