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Boundedly Rational Expected Utility Theory

Navarro-Martinez, Daniel and Loomes, Graham and Isoni, Andrea and Butler, David and Alaoui, Larbi (2017): Boundedly Rational Expected Utility Theory.

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Abstract

We build a satisficing model of probabilistic choice under risk which embeds Expected Utility Theory (EUT) into a boundedly rational deliberation process. The decision maker accumulates evidence for and against alternative options by repeatedly sampling from her underlying set of EU preferences until the evidence favouring one option satisfies her desired level of confidence. Notwithstanding its EUT core, the model produces patterns of behaviour that violate standard axioms, while at the same time capturing the systematic relationship between choice probabilities, response times and confidence judgments, which is beyond the scope of theories that do not take deliberation into account.

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