Decision Making as Epiphany: A Search Based Model of Limited Rationality

Abstract

(Preliminary Version – please do not cite without permission) In this paper we propose a dynamic model of boundedly rational agents in which, be-cause of cognitive and/or and memory limitations, agents fail to comprehend all of the actions that are available to them at a given point in time. However, they can formulate new “ideas ” that reveal alternative courses of action via a costly process of ratiocina-tion – “thinking. ” Agents are aware of the distribution of potential rewards that accrue from each new idea: they are fully appraised of the economically essential aspects of their own ignorance. We establish that their behavior is characterized by a reservation utility, and we analyze the determinants of their optimal thinking “intensity. ” Our ap-proach is notable in that it provides a useful, but albeit rudimentary, characterization of an agent’s innate intelligence. Thus, one agent is more intelligent than another if, ceteris paribus, he thinks of ideas at a faster rate and/or thinks of better quality ideas. We apply the framework to a variety of economic settings. Epiphany. A sudden, intuitive perception of or insight into the reality or essential meaning of something, usually initiated by some simple, homely, or commonplace occur-rence or experience. [Random House, Webster’s unabridged dictionary, 2002].

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