Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Economic Research Unit (ERU-Kolkata)


Banerjee, Priyodorshi (ERU-Kolkata; ISI)

Abstract (Summary of the Work)

Decision theory or the theory of choice is the analysis of individual behavior, typically in noninteractive situations. We can conceptualize two types of decision theory - normative and descriptive. A normative theory is concerned with identifying the best decision to make, modeling a decision maker who comports to certain ideals. A descriptive theory is a theory about how decisions are made. Such a theory is concerned with explaining observed behavior or predicting behavior under the assumption that the decision-maker or decision process follows some rules. The predictions about behavior that descriptive theory produces allow further tests of the assumed underlying, and unobservable, decision-making rules.The concept of rationality occupies a central position in decision theory. A rational decision-maker is an individual with a consistent preference structure, given some definition of consistency. Rational choice theory (RCT) therefore is concerned with the decisions and behavior of rational individuals. RCT assumes that any individual has a preference structure over the available choice alternatives that allows him/her to determine which option is preferred. A rational agent is assumed to take account of available information, probabilities of events, and potential costs and benefits in forming preferences, and to act consistently in choosing the self-determined best alternative. Typical assumptions related to preferences which enable the constitution of the idea of consistency include completeness and transitivity.Rationality is widely used as an assumption regarding the behavior of individuals in microeconomic models and analyses, and RCT can be said to be an integral part of the currently dominant theoretical approach in microeconomics. Explicit theories of rational economic choices began to get developed in the late 19t h century. These theories commonly linked choice of an object to the increase in happiness or satisfaction or utility an increment of this object would bring; classical economists like Jevons for example held that agents make consumption choices so as to maximize their own happiness (see e.g. Grüne-Yanoff [45]). However there has been increasing dissociation in economics through the course of the late 20th and early 21st centuries of happiness or related concepts from the ambit of RCT. The theory now focuses on rationality as the maintenance of a consistent ranking of alternatives, and not so much on the explication of the rationality of choices resulting from an effort to maximize happiness.These criticisms have given rise to alternatives to RCT. A particularly important such alternative is what is called ‘boundedly rational’ choice theory (BRCT). The idea is that bounded rationality gives psychologically more plausible models of human decision-making without hurting the notion of rationality altogether.Bounded rationality conceptualizes decision makers as working under three unavoidable constraints - i) only limited, often unreliable, information is available regarding possible alternatives and their consequences, ii) the human mind has only a limited capacity to evaluate and process information that is available, iii) only a limited amount of time is available to make decisions. Therefore even individuals who intend to make rational choices are not bound to do so in complex situations. According to Simon [89](Pg. 266), the point of bounded rationality is to


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Creative Commons Attribution 4.0 International License
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