Thinking Ahead: The Decision Problem

Abstract

We propose a model of bounded rationality based on time-costs of deliberating current and future decisions. We model an individual decision maker%u2019s thinking process as a thought-experiment that takes time and let the decision maker %u201Cthink ahead%u201D about future decision problems in yet unrealized states of nature. By formulating an intertemporal, state-contingent, planning problem, which may involve costly deliberation in every state of nature, and by letting the decision-maker deliberate ahead of the realization of a state, we attempt to capture the basic idea that individuals generally do not think through a complete action-plan. Instead, individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise.