A sparsity-based model of bounded rationality
By: Xavier Gabaix
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 16911; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16911.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper proposes a model in which the decision maker builds an optimally simplified representation of the world which is "sparse," i.e., uses few parameters that are non-zero.  Sparsity is formulated so as to lead to well-behaved, convex maximization problems.  The agent's choice of a representation of the world features a quadratic proxy for the benefits of thinking and a linear formulation for the costs of thinking.  The agent then picks the optimal action given his representation of the world.  This model yields a tractable procedure, which embeds the traditional rational agent as a particular case, and can be used for analyzing classic economic questions under bounded rationality.  For instance, the paper studies how boundedly rational agents select a consumption bundle while paying imperfect attention to prices, and how frictionless firms set prices optimally in response.  This leads to a novel mechanism for price rigidity.  The model is also used to examine boundedly rational intertemporal consumption problems and portfolio choice with imperfect understanding of returns"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/9/2011.

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