Coarse decision making and overfitting

Nabil I. Al-Najjar and Mallesh M. Pai

Journal of Economic Theory, 2014, vol. 150, issue C, 467-486

Abstract: We study decision makers who willingly forgo decision rules that vary finely with available information, even though these decision rules are technologically feasible. We model this behavior as a consequence of using classical, frequentist methods to draw robust inferences from data. Coarse decision making then arises to mitigate the problem of over-fitting the data. The resulting behavior tends to be biased towards simplicity: decision makers choose models that are statistically simple, in a sense we make precise. In contrast to existing approaches, the key determinant of the level of coarsening is the amount of data available to the decision maker. The decision maker may choose a coarser decision rule as the stakes increase.

Keywords: Coarse decision making; Statistical learning; Overfitting; VC-dimension; Bounded rationality (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:150:y:2014:i:c:p:467-486

DOI: 10.1016/j.jet.2013.12.003

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