Classifying bounded rationality in limited data sets: a Slutsky matrix approach

Abstract

Given any observed finite sequence of prices, wealth, and demand choices, we propose a way to measure and classify the departures from rationality in a systematic fashion, by connecting violations of the underlying Slutsky matrix properties to the length of revealed demand cycles. The approach complements our previous study (Aguiar and Serrano in J Econ Theory 172: 2017), which is based on the entire demand function. The methodology can be easily applied in experimental demand data sets.

Bounded rationality and animal spirits: a fluctuation-response approach to Slutsky matrices

“…In response to the inconclusiveness of empirical tests, some authors have shown that there is in fact no reason for symmetry to hold when taking into account the fact that consumers are many [29], non-cooperative households [30], or bounded rationality in the form of limited attention [31]. More recently, there have also been some attempts at taking into account the somewhat unrealistic nature of the assumptions behind the classical Slutsky equation, with the idea of providing a measure of some loosely defined rationality based on the nearness between the theoretical prediction and estimates constructed from observed demand functions [32,33].…”