Article | Journal of Economic Theory | July 2003

Probabilistic Representation of Complexity

by Nabil I Al-Najjar, Ramon Casadesus-Masanell and Emre Ozdenoren

Abstract

We study individuals' behavior in an environment that is deterministic, but too complex to permit tractable deterministic representation. Under mild conditions, behavior is represented by a unique probabilistic model in which the agent's inability to think through all contingencies of the problem translates into uncertainty about random states. We interpret this probabilistic model as embodying all patterns the agent perceives in his environment, yet allowing for the possibility that there may be important details he had missed. The implied behavior is rational in the traditional sense, yet consistent with an agent who believes his environment is too complex to warrant precise planing, foregoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility.

Keywords: Complexity; Behavior; Problems and Challenges; Risk and Uncertainty; Planning;

Citation:

Al-Najjar, Nabil I., Ramon Casadesus-Masanell, and Emre Ozdenoren. "Probabilistic Representation of Complexity." Journal of Economic Theory 111, no. 1 (July 2003): 49–87.