Experimental Economics

, Volume 1, Issue 2, pp 163–183

Bounded rationality in individual decision making

  • Colin Camerer
Article

Abstract

The main objectives of this paper are: (i) To give a pithy, opinionated summary of what has been learned about bounded rationality in individual decision making from experiments in economics and psychology (drawing on my 1995 Handbook of Experimental Economics chapter); and (ii) mention some promising new directions for research which would be included if that chapter were written today.

Keywords

JEL Classification 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ainslie, G. (1975). “Specious Reward: A Behavioral Theory of Impulsiveness and Impulse Control.”Psycholoical Bulletin. 82, 463–509.Google Scholar
  2. Becker, G.S. and Murphy, K.M. (1988). “A Theory of Rational Addiction.”Journal of Political Economy. 96, 675–700.Google Scholar
  3. Benartzi, S. and Richard, T. (1995). “Myopic Loss Aversion and the Equity Premium Puzzle.”Quarterly Journal of Economics. 101, 73–92.Google Scholar
  4. Bowman, D., Minehart, D., and Rabin, M. (1996). “Loss Aversion in a Savings Model.” Berkeley Working Paper, University of California,.Google Scholar
  5. Buschena, D. and Zilberman, D. (1995). “Performance of the Similarity Hypothesis Relative to Existing Models of Risky Choice.”Journal of Risk and Uncertainty. 11, 233–254.Google Scholar
  6. Camerer, C.F. (1987). “Do Biases in Probability Judgment Matter in Markets? Experimental Evidence?”American Economic Review. 77, 981–997.Google Scholar
  7. Camerer, C.F. (1989). “An Experimental Test of Several Generalized Utility Theories.”Journal of Risk and Uncertainty. 2, 61–104.Google Scholar
  8. Camerer, C.F. (1992). “Recent Tests of Generalized Utility Theories.” In W. Edwards (ed.),Utility Theories: Measurement and Applications. Cambridge: Cambridge University Press.Google Scholar
  9. Camerer, C.F. (in press). “Behavioral Economics in the Wild: Field Evidence for Prospect Theory.” In D. Kahneman and A. Tversky (eds.),Choices, Values and Frames. Google Scholar
  10. Camerer, C.F., Babcock, L., Loewenstein, G., and R. Thaler (1997). “Labor Supply of New York City Cab Drivers: One day at a Time.”Quarterly Journal of Economics. 103, 407–441.Google Scholar
  11. Camerer, C.F. and Ho., T.H. (in press). “Experience-Weighted Attraction Learning in Normal-Form Games.” Econometrica.Google Scholar
  12. Camerer, C.F. and Weber, M.W. (1992). “Recent Developments in Modeling Preferences: Uncertainty and Ambiguity.”Journal of Risk and Uncertainty. 5, 325–370.Google Scholar
  13. Canning, D. (1997). “Evolution, Preferences, and Choice Under Uncertainty.” Queen's University of Belfast Working Paper.Google Scholar
  14. Chew, S.H. and MacCrimmon, K.R. (1979). “Alpha Utility Theory, Lottery Composition and the Allais Paradox.” University of British Columbia Faculty of Commerce and Business Administration#686.Google Scholar
  15. Chew, S.H. and Waller, W.S. (1986). “Empirical Tests of Weighted Utility Theory.”Journal of Mathematical Psychology. 30, 55–72.Google Scholar
  16. Ciccheti, C. and Dubin, J. (1994). “A Microeconometric Analysis of Risk-Aversion and the Decision to Self-Insure.”Journal of Political Economy. 102, 169–186.Google Scholar
  17. Cohen, D. and Knetsch, J.L. (1992). “Judicial Choice and Disparities Between Measure of Economic Values.”Osgoode Hall Law Journal. 30, 737–792.Google Scholar
  18. Cook, P.J. and Clotfelter, C.T. (1993). “The Peculiar Scale Economies of Lotto.”American Economic Review. 83, 634–643.Google Scholar
  19. Cubitt, R. and Sugden, R. (in press). “The Selection of Preferences Through Imitation.”Review of Economics Studies. Google Scholar
  20. Frisch, D. and Baron, J. (1988). “Ambiguity and Rationality.”Journal of Behavioral Decision Making. 1, 149–157.Google Scholar
  21. Ganguly, A., Kagel, J.H., and Moser, D.V. (1998). “Do Asset Market Prices Reflect Traders' Judgment Biases?” Working Paper, University of Pittsburgh.Google Scholar
  22. Ghirardato, P. (1997). “On Independence for Non-Additive Mtasures, with a Fubini Theorem.”Journal of Economic Theory. 73, 261–291.Google Scholar
  23. Gilboa, I. and Schmeidler, D. (1995). “Case-Based Decision Theory.”Quarterly Journal of Economics. 110, 605–640.Google Scholar
  24. Hardie, B.G.S., Johnson, E.J., and Fader, P.S. (1993). “Modeling Loss Aversion and Reference Dependence Effects on Brand Choice.”Marketing Science. 12, 378–394.Google Scholar
  25. Harless, D. and Camerer, C.F. (1994). “The Predictive Utility of Generalized Expected Utility Theories.”Econometrica. 62, 1251–1290.Google Scholar
  26. Hey, J.D. and Orme, C. “Investigating Generalizations of Expected Utility Theory Using Experimental Data.”Econometrica. 62 (November), 1291—.Google Scholar
  27. Jullien, Bruno and Salanié, Bernard. (1997). “Estimating Preferences Under Risk: The Case of Racetrack Bettors.” IDEI and GREMAQ Toulouse University working paper.Google Scholar
  28. Kahneman, D. and Tversky, A. (1979). “Prospect Theory: An Analysis of Decision Under Risk.”Econometrica. 47, 263–291.Google Scholar
  29. Kahneman, D. and Tversky, A. (1992). “Advances in Prospect Theory: Cumulative Representation of Uncertainty.”Journal of Risk and Uncertainty. 5, 297–324.Google Scholar
  30. Kahneman, D., Sarin, R., and Wakker, P.P. (1997). “Back to Bentham? Explorations of Experienced Utility.”Quarterly Journal of Economics. 112, 375–406.Google Scholar
  31. Laibson, D.I. (1996). “A Cue Theory of Consumption.” Harvard University Manuscript.Google Scholar
  32. Laibson, D.I. (1997). “Golden Eggs and Hyperbolic Discounting.”Quarterly Journal of Economics. 112, 443–478.Google Scholar
  33. Lattimore, P.K., Baker, J.R., and Witte, A.D. (1992). “The Influence of Probability on Risky Choice: A Parametric Investigation.”Journal of Economic Behavior and Organization. 17, 377–400.Google Scholar
  34. Leland, J. (1991). “A Theory of Approximate Expected Utility Maximization.” Carnegie-Mellon Department of Social and Decision Sciences.Google Scholar
  35. Loewenstein, G. (1987). “Anticipation and the Valuation of Delayed Consumption.”Economic Journal. 97, 666–684.Google Scholar
  36. Loewenstein, G. (1992). “The Fall and Rise of Psychological Explanation in the Economics of Intertemporal Choice.” In G. Loewenstein and J. Elster (eds.),Choice Over Time. New York: Russell Sage Foundation.Google Scholar
  37. Loewenstein, G. (1996). “Out of Control: Visceral Influences on Behavior.”Organizational Behavior and Human Decision Processes. 65, 272–292.Google Scholar
  38. Loewenstein, G. and Schkade, D. (in press). “Wouldn't it be Nice? Predicting Future Feelings.” In E. Diener, D. Kahneman, and N. Schwarz (eds.),Foundations of hedonic psychology: Scientific perspectives on enjoyment and suffering. New York: Russell Sage Foundation Press.Google Scholar
  39. Machina, M.J. (1982). “‘Expected Utility’ Analysis Without the Independence Axiom.”Econometrica. 50, 277–323.Google Scholar
  40. Morgenstern, O. (1979). “Some Reflections on Utility Theory.” In M. Allais and O. Hagen (eds.),The Expected Utility Hypothesis and the Allais Paradox. Dordrecht: D. Reidel.Google Scholar
  41. Myagkov, M. and Plott, C.R. (1997). “Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments.”American Economic Review. 87, 801–828.Google Scholar
  42. Odean, Terrance. (in press). “Are Investors Reluctant to Realize Their Losses?”Journal of Finance. Google Scholar
  43. O'Donoghue, T. and Rabin, M. (in press). “Doing it Now, or Later.”American Economic Review. Google Scholar
  44. Phelps, E.S. and Pollak, R.A. (1968). “On Second-Best National Saving and Game-Equilibrium Growth.”Review of Economic Studies. 35, 201–208.Google Scholar
  45. Prelec, D. (in press). “The Probability Weighting Function.”Econometrica. Google Scholar
  46. Quiggin, J. (1982). “A Theory of Anticipated Utility.”Journal of Economic Behavior and Organization. 3, 323–343.Google Scholar
  47. Rabin, M. and Schrag, J. (1997). “Confirmation Bias.” Berkeley Department of Economics Working Paper, University of California (unpublished).Google Scholar
  48. Read, D. and Loewenstein, G. (1995). “The Diversification Bias: Explaining the Difference Between Prospective and Real-Time Taste for Variety.”Journal of Experimental Psychology: Applied. 1, 34–49.Google Scholar
  49. Rubinstein, A. (1988). “Similarity and Decision-Making Under Risk (Is There a Utility Theory Resolution to the Allais Paradox?).”Journal of Economic Theory. 46, 145–153.Google Scholar
  50. Rubinstein, A. (1997).Modeling Bounded Rationality. Cambridge: MIT Press.Google Scholar
  51. Sargent, T.J. (1994).Bounded Rationality in Macroeconomics. New York: Oxford.Google Scholar
  52. Schmeidler, D. (1989). “Subjective Probability and Expected Utility Without Additivity.”Econometrica. 57, 571–587.Google Scholar
  53. Shea, J. (1995). “Union Contracts and the Life-Cycle/Permanent-Income Hypothesis.”American Economic Review. 85, 186–200.Google Scholar
  54. Shizgal, P. (1997). “Neural Basis of Utility Estimation.”Current Opinion in Neurobiology. 7, 198–206.Google Scholar
  55. Starmer, C. (in press). “Developments in Non-Expected Utility Theory: The Hunt for a Descriptive Theory of Choice Under Risk.”Journal of Economic Literature. Google Scholar
  56. Sunstein, C. (1997). “Behavioral Analysis of Law.”University of Chicago Law Review. 64, 1175–1189.Google Scholar
  57. Thaler, R.H. (in press). “Mental Accounting Matters.” In D. Kahneman and A. Tversky (eds.),Choices, Values and Frames. Google Scholar
  58. Thaler, R.H. (ed.). (1995).Advances in Behavioral Finance. New York: Russell Sage Foundation Press.Google Scholar
  59. von Neumann, J. and Morgenstern, O. (1944).Theory of Games and Economic Behavior. Princeton: Princeton University Press.Google Scholar
  60. Weibull, J.W. (1995).Evolutionary Game Theory. Cambridge: MIT Press.Google Scholar

Copyright information

© Economic Science Association 1998

Authors and Affiliations

  • Colin Camerer
    • 1
  1. 1.Division of Humanities and Social SciencesCalifornia Institute of TechnologyPasadenaUSA

Personalised recommendations