This paper focuses on tacit versus explicit uses of plural performance metrics as a primary methodological characteristic. This characteristic usefully distinguishes two schools of normative analysis and their approaches to normative interpretations of bounded rationality. Both schools of thought make normative claims about bounded rationality by comparing the performance of decision procedures using more than one performance metric. The consistency school makes tacit reference to performance metrics outside its primary axiomatic framework, but lexicographically promotes internal axiomatic consistency as the primary, (...) and in most cases sufficient, normative outcome with which to undertake welfare comparisons. The consistency school's axiomatization program, in both neoclassical and behavioral forms, pre-commits to welfare interpretations that follow a hierarchy of rationalities based on the stringency of restrictions that different axiomatizations impose on choice data. In contrast, the ecological rational.. (shrink)

Heterogeneous beliefs and decision processes generate positive externalities for social and economic systems, analogous to biodiversity in biological systems. Although some aspects of biodiversity (e.g., pests, parasites and bacteria) can lead to ecological and economic problems, biodiversity provides flows of beneficial ecological services and is widely regarded as a valuable natural resource and informational asset, whose value increases as we learn more and science progresses (Wilson in Bioscience 35(11):700–706, 1985). Heterogeneous beliefs and decision processes (and heterogeneous behaviors they generate) similarly (...) provide flows of beneficial economic services. Behavioral diversity should therefore be seen as a natural resource and informational asset likely to improve human wellbeing in surprising ways in the future. Paternalistic policies motivated by the goal of “correcting” allegedly suboptimal beliefs and behavior that diverge from expert recommendations jeopardize behavioral diversity at a substantial cost to social welfare. The risk of encroaching on this beneficial behavioral heterogeneity with policies that aim to induce behavioral and belief monocultures should be included explicitly as costs when evaluating nudges and other paternalistic policies. (shrink)

Bank customers are not financial experts, and yet they make high-stakes decisions that can substantively affect personal wealth. Sooner or later, every individual has to take relevant investment decisions. Using data collected from financial advisors, bank customers and university students in Italy, this paper aims to reveal new insights about the decision processes of average non-expert investors: their investment goals, the information sets they consider, and the factors that ultimately influence decisions about investment products. Using four portfolio choice tasks based (...) on data collected directly from financial advisors and their clients, we find that most subjects used a limited set of information, ignoring factors that conventional economic models usually assume drive investor behavior. Furthermore, we suggest that non-compensatory decision-tree models, which make no trade-offs among investment features, are parsimonious descriptions of investor behavior useful for improving the organization of financial institutions and in policy contexts alike. (shrink)

Given free information and unlimited processing power, should decision algorithms use as much information as possible? A formal model of the decision-making environment is developed to address this question and provide conditions under which informationally frugal algorithms, without any information or processing costs whatsoever, are optimal. One cause of compression that allows optimal algorithms to rationally ignore information is inverse movement of payoffs and probabilities (e.g., high payoffs occur with low probably and low payoffs occur with high probability). If inversely (...) related payoffs and probabilities cancel out, then predictors that correlate with payoffs and consequently condition the probabilities associated with different payoffs will drop out of the expected-payoff objective function, severing the link between information and optimal action rules. Stochastic payoff processes in which rational ignoring occurs are referred to as compressed environments, because optimal action depends on a reduced-dimension subset of the environmental parameters. This paper considers benefits and limitations of economic models versus other methods for studying links between environmental structure and the real-world success of simple decision procedures. Different methods converge on the normative proposition of ecological rationality, as opposed to axiomatic rationality based on informational efficiency and internal consistency axioms, as a superior framework for comparing the effectiveness of decision strategies and prescribing decision algorithms in application. (shrink)