Coarse, e¢ cient decision-making
نویسنده
چکیده
To achieve e¢ ciency, an agent who uses criteria to make choice decisions should employ the coarse criteria that have a small number of categories. Coarse criteria reduce decision-making cost even though an agent, to maintain the number of choice distinctions, must use more criteria. The most e¢ cient criteria are binary with two categories each; this result holds even if the marginal cost of using more categories declines to 0. That coarse criteria are used in practice can therefore be explained as a result of optimization rather than cognitive limitations. Binary criteria also generate choice functions that maximize rational preferences, thus linking e¢ ciency to rational choice. The e¢ ciency-of-binary-criteria principle applies to information storage: binary digits store information more e¢ ciently than k-ary digits for any k > 2. JEL codes: D01
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