Order-k Rationality

Recognition Program

Authors: Salvador Barberà, Geoffroy De Clippel, Alejandro Neme and Kareen Rozen

Economic Theory, Vol. 73, No 4, 1135-1153 , June, 2022

A decision maker (DM) may not perfectly maximize her preference over the feasible set. She may feel it is good enough to maximize her preference over a sufficiently large consideration set; or just require that her choice is sufficiently well-ranked (e.g., in the top quintile of options); or even endogenously determine a threshold for what is good enough, based on an initial sampling of the options. Heuristics such as these are all encompassed by a common theory of order-k rationality, which relaxes perfect optimization by only requiring choices from a set S to fall within the set’s top k(S) elements according to the DM’s preference ordering. Heuristics aside, this departure from rationality offers a natural way, in the classic ‘as if’ tradition, to gradually accommodate more choice patterns as k increases. We characterize the empirical content of order-k rationality (and related theories), and provide a tractable testing method which is comparable to the method of checking SARP.

This paper originally appeared as Barcelona School of Economics Working Paper 1130
This paper is acknowledged by the Barcelona School of Economics Recognition Program