Probabilistic representation of complexity

Nabil I. Al-Najjar*, Ramon Casadesus-Masanell, Emre Ozdenoren

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

We introduce a framework to study individuals' behavior in environments that are deterministic, but too complex to permit tractable deterministic representations. An agent in these environments uses a probabilistic model to cope with his inability to think through all contingencies in advance. We interpret this probabilistic model as embodying all patterns the agent perceives, yet allowing for the possibility that there may be important details he had missed. Although the implied behavior is rational, it is consistent with an agent who believes his environment is too complex to warrant precise planning, foregoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility.

Original languageEnglish (US)
Pages (from-to)49-87
Number of pages39
JournalJournal of Economic Theory
Volume111
Issue number1
DOIs
StatePublished - Jul 1 2003

Keywords

  • Bounded rationality
  • Cognitive uncertainty
  • Complexity
  • Incomplete contracts

ASJC Scopus subject areas

  • Economics and Econometrics

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