Victor H. Aguiar, Brown University

Slutsky Matric Norms: The Size, Classification and Comparative Statics of Bounded Rationality
Monday, 18 January 2016 - 11:30 am to 1:00 pm
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Yazid Dissou
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Free of charge
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Abstract    Given any observed demand behavior by means of a demand function, we quantify by how much it departs from rationality. The measure of the gap is the smallest Frobenius norm of the correcting matrix function that would yield a Slutsky matrix with its standard rationality properties (symmetry, singularity, and negative semidefiniteness). A useful classification of departures from rationality is suggested as a result. Errors in comparative statics predictions from assuming rationality are decomposed as the sum of a behavioral error (due to the agent) and a mis-specification error (due to the modeller). Comparative statics for the boundedly rational consumer is expressed as path dependence of wealth compensations in price-equivalent paths, or as violations of the compensated law of demand. Illustrations are provided using several bounded rationality models.