Essays in Microeconomic Theory: Framing and Complexity of Choice

Abstract

This Dissertation comprises three chapters investigating the theory of framing effects and complexity of choice in the context of individual decision making.In the first chapter, I consider a boundedly rational agent who employs a stochastic automaton decision rule to search for the best item drawn randomly with replacement from a menu of unknown composition. I study the minimal state and transition complexity of an automaton that allows the agent to choose the best alternative from any menu with probability arbitrarily close to one. Agents differ in their languages---collections of binary attributes used to describe alternatives. I provide the tight lower bounds and upper bounds on complexity among all languages. In the wide range of environments, the language is least complex if and only if it allows the agent to use an additive utility function with respect to the smallest possible set of attributes. In the second chapter, I develop and analyze a model of framing under ambiguity. Frames are circumstances, unobservable to the analyst, that shape the perception of the relevant ambiguity by the agent. The analyst observes a choice correspondence that represents the set of possible choices under the various decision frames. My first result provides axioms that are equivalent to a multi-multiple prior model. I then show that the analyst can infer the unique minimum collection of frames from the choice behavior. Finally, I analyze the degree to which frames affect choice and the behavioral implications of combining several decision frames. In the third chapter, I consider decision frames comprised of observable features of the environment and interpret each feature as an unobservable signal structure that provides the agent information regarding her own preferences. An analyst observes the resulting stochastic choice of a population of agents with heterogeneous state-dependent utility functions. I show that almost any stochastic choice that admits a random utility representation within each frame is consistent with such model. However, when the state space has limited cardinality, the resulting stochastic choice should satisfy additional constraints on the sums of Block and Marschak (1960) polynomials constructed from choice frequencies under each decision frame.