Slutsky matrix norms: The size, classification, and comparative statics of bounded rationality

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. JEL classification numbers: C60, D10.