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Subjective Representation of Complexity

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  • Nabil I. Al-Najjar
  • Ramon Casadesus-Masanell
  • Emre Ozdenoren

Abstract

We study how individuals cope with the complexity of their environment by developing subjective models, or representations, to guide their predictions and decisions. Formally, an individual who believes his environment is deterministic, but too complex to permit tractable deterministic representation, builds a probablistic model embodying perceived regularities of that environment. In this model, the individual's inability to think through all possible instances of the problem is represented by an uncertainty about random states. The resulting behavior is fully rational in the traditional sense, yet consistent with an agent who believes his environment is too complex to warrant precise planing, forgoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility. We consider applications to time-inconsistent preferences, delegation, and two-player simultaneous games.

Suggested Citation

  • Nabil I. Al-Najjar & Ramon Casadesus-Masanell & Emre Ozdenoren, 1999. "Subjective Representation of Complexity," Discussion Papers 1249, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1249
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    References listed on IDEAS

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    Cited by:

    1. Andreas Ramsauer, 1999. "Heterogeneous Discount Factors in an Assignment Model with Search Frictions," Vienna Economics Papers 9807, University of Vienna, Department of Economics.

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