| Xavier Gabaix, Massachusetts Institute of Technology David Laibson, Harvard University |
| Bounded Rationality and Directed Cognition |
| Session: C-12-2 Wednesday 16 August 2000 by Laibson, David |
| Cognition takes time and time is costly. Sophisticated decision-makers will use heuristics that conserve time by ignoring contingencies that have a relatively small impact on expected payoffs. This paper proposes and experimentally tests a psychologically plausible bounded rationality model based on these principles. This model outperforms the rational actor model and several other choice models. We then show how this naturally extends to a theory of symmetric information games played by several bounded rational agents. We finally show how the model makes predictions on the form of contracting between bounded rational agents. |