Berg, Nathan and Hoffrage, Ulrich (2010): Compressed environments: Unbounded optimizers should sometimes ignore information. Published in: Minds and Machine , Vol. 20, No. 2 : pp. 259275.

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Abstract
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 expectedpayoff 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 reduceddimension 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 realworld 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.
Item Type:  MPRA Paper 

Original Title:  Compressed environments: Unbounded optimizers should sometimes ignore information 
Language:  English 
Keywords:  Ecological rationality, Bounded rationality, Frugality, Simplicity 
Subjects:  D  Microeconomics > D0  General > D03  Behavioral Microeconomics: Underlying Principles 
Item ID:  26372 
Depositing User:  Nathan Berg 
Date Deposited:  04. Nov 2010 09:21 
Last Modified:  16. Feb 2013 02:01 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/26372 