Minds and Machines 20 (2):259-275 (2010)
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.
|Keywords||Bounded rationality Ecological rationality Frugality Simplicity|
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References found in this work BETA
Judgment Under Uncertainty: Heuristics and Biases.Daniel Kahneman, Paul Slovic & Amos Tversky (eds.) - 1982 - Cambridge University Press.
Homo Heuristicus: Why Biased Minds Make Better Inferences.Gerd Gigerenzer & Henry Brighton - 2009 - Topics in Cognitive Science 1 (1):107-143.
Fast, Frugal, and Fit: Simple Heuristics for Paired Comparison.Laura Martignon & Ulrich Hoffrage - 2002 - Theory and Decision 52 (1):29-71.
Citations of this work BETA
The Consistency and Ecological Rationality Approaches to Normative Bounded Rationality.Nathan Berg - 2014 - Journal of Economic Methodology 21 (4):375-395.
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