14127_lec4_noise

14127_lec4_noise - 14.127 Lecture 4 Xavier Gabaix 1 Bounded...

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Unformatted text preview: 14.127 Lecture 4 Xavier Gabaix February 26, 2004 1 Bounded Rationality Three reasons to study: • Hope that it will generate a unified framework for behavioral economics • Some phenomena should be captured: difficult-easy difference. It would be good to have a metric for that Artificial intelligence • Warning — a lot of effort spend on bounded rationality since Simon and few results. Three directions: Analytical models • — Don’t get all the fine nuances of the psychology, but those models are tractable. Process models, e.g. artificial intelligence • — Rubinstein direction. Suppose we play Nash, given your reaction func- tion, my strategy optimizes on both outcome and computing cost. Rubinstein proves some existence theorems. But it is very difficult to apply his approach. • Psychological models — Those models are descriptively rich, but they are unsystematic, and often hard to use. Human- computer comparison Human mind 10 15 operations per second • • Computer 10 12 operations per second Moore’s law: every 1.5 years computer power doubles • Thus, every 15 years computer power goes up 10 3 • If we believe this, then in 45 years computers can be 10 6 more powerful than humans • Of course, we’ll need to understand how human think • 1.1 Analytical models Bounded Rationality as noise. Consumer sees a noisy signal q ˜ = q + σε • of quantity/quality q . Bounded Rationality as imperfect monitoring of the state of the world. • People don’t think about the variables all the time. They look up variable k at times t 1 , ..., t n Bounded Rationality as adjustment cost. Call by θ the parameters of the • world. — Now I am doing a 0 and κ = cost of decision/change — I change my decision from a 0 to a ∗ = arg max u ( a,θ t ) iff u ( a ∗ ,θ t ) − u ( a ,θ t ) > κ 1.1.1 Model of Bounded Rationality as noise Random utility model — Luce (psychologist) and McFadden (econometri- • cian who provided econometric tools for the models) — n goods, i = 1 ,..., n ....
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This note was uploaded on 12/26/2011 for the course ECON 14.127 taught by Professor Staff during the Fall '10 term at MIT.

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14127_lec4_noise - 14.127 Lecture 4 Xavier Gabaix 1 Bounded...

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