Rationalization

Joint with: Vadim Cherepanov, Timothy Feddersen

In 1908 the Welsh neurologist and psychoanlayst Ernest Jones described human beings as rationalizers whose behavior is governed by "the necessity of providing an explanation." We construct a formal model of rationalization. In our model a decision maker is constrained to select the best feasible alternative

(according to her preferences) from among those that she can rationalize. We show that this theory is falsiÂ…able and can be tested non-parameterically like the standard theory of choice. We also show that the theory of rationalization

subsumes the standard theory and several alternative theories. Rationalization theory can accommodate behavioral patterns often presented in the empirical literature as anomalies (i.e., violations of the standard theory of choice).

Hence, these anomalies are consistent with the basic principle in economics that choice follows from a constrained optimization process. Moreover, anom-

alies like cylic choices do not imply cyclic preferences and can be accommodated with preference orders. In fact, anomalies can be used to make inferences about

the decision makerÂ’s preferences. Rationalization theory reveals a unique preference order in a variety of cases when standard theory cannot. Conversely,when standard theory reveals an order rationalization reveals the same order.

These results show that, under suitable assumptions, rationalization theory allows for complete, non-parametric identification of preferences. In addition,rationalization theory can be easily incorporated into game theory.

For more information, contact Jing Li.