Probabilistic representation of complexity.

DOI10.1016/S0022-0531(03)00075-9MaRDI QIDQ1400985zbMATH OpenFDO

Authors Nabil I. Al-Najjar, Ramon Casadesus-Masanell, Emre Ozdenoren

Publication date 17 August 2003

Published in Journal of Economic Theory (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/S0022-0531(03)00075-9

zbMATH Keywords

cognitive psychologycognitive uncertaintylabor market

Mathematics Subject Classification ID

Rationality and learning in game theory (91A26) Cognitive psychology (91E10)

Review text

A remarkable aspect of human behavior is individuals' ability to cope with complexity. The role of complexity in everyday life is almost self-evident: people engage in complex social and economic interactions where it is pointless to examine every possible contingency. While its importance and pervasiveness is beyond dispute, complexity is an elusive concept in a formally model. Difficulties arise from modeling complexity in a way that precludes systematic errors and arbitrage opportunities that undermine the equilibrium analysis. Here an agent's behavior is explained as a result of a coherent probabilistic model representing his attempt at identifying patterns or regularities, while at the same time recognizing that his model cannot explain everything. This paper proposes an approach that produces interesting cognitive limitations due to complexity, yet behavior is rational in the sense of being consistent with learning from data and displays no exploitable systematic errors.

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Cited in

(3)

• Representation of complex probabilities
• Interpreted and generated signals
• Inter-temporal preference for flexibility and risky choice

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