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Multinomial logit processes and preference discovery: inside and outside the black box

Simone Cerreia-Vioglio, Fabio Maccheroni, Massimo Marinacci and Aldo Rustichini

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Abstract: We provide two characterizations, one axiomatic and the other neuro-computational, of the dependence of choice probabilities on deadlines, within the widely used softmax representation \[ p_{t}\left( a,A\right) =\dfrac{e^{\frac{u\left( a\right) }{\lambda \left( t\right) }+\alpha \left( a\right) }}{\sum_{b\in A}e^{\frac{u\left( b\right) }{\lambda \left( t\right) }+\alpha \left( b\right) }}% \] where $p_{t}\left( a,A\right) $ is the probability that alternative $a$ is selected from the set $A$ of feasible alternatives if $t$ is the time available to decide, $\lambda$ is a time dependent noise parameter measuring the unit cost of information, $u$ is a time independent utility function, and $\alpha$ is an alternative-specific bias that determines the initial choice probabilities and possibly reflects prior information. Our axiomatic analysis provides a behavioral foundation of softmax (also known as Multinomial Logit Model when $\alpha$ is constant). Our neuro-computational derivation provides a biologically inspired algorithm that may explain the emergence of softmax in choice behavior. Jointly, the two approaches provide a thorough understanding of soft-maximization in terms of internal causes (neurophysiological mechanisms) and external effects (testable implications).

Date: 2020-04, Revised 2020-09
New Economics Papers: this item is included in nep-dcm and nep-upt
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Working Paper: Multinomial logit processes and preference discovery: inside and outside the black box (2017) Downloads
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