Coarse decision making and overfitting

Nabil I. Al-Najjar*, Mallesh M. Pai

*Corresponding author for this work

Research output: Contribution to journalArticle

8 Scopus citations

Abstract

We study decision makers who willingly forgo decision rules that vary finely with available information, even though these decision rules are technologically feasible. We model this behavior as a consequence of using classical, frequentist methods to draw robust inferences from data. Coarse decision making then arises to mitigate the problem of over-fitting the data. The resulting behavior tends to be biased towards simplicity: decision makers choose models that are statistically simple, in a sense we make precise. In contrast to existing approaches, the key determinant of the level of coarsening is the amount of data available to the decision maker. The decision maker may choose a coarser decision rule as the stakes increase.

Original languageEnglish (US)
Pages (from-to)467-486
Number of pages20
JournalJournal of Economic Theory
Volume150
Issue number1
DOIs
StatePublished - Jan 8 2014

Keywords

  • Bounded rationality
  • Coarse decision making
  • Overfitting
  • Statistical learning
  • VC-dimension

ASJC Scopus subject areas

  • Economics and Econometrics

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