American Economic Association

Sequentially Rationalizable Choice Author(s): Paola Manzini and Marco Mariotti Reviewed work(s): Source: The American Economic Review, Vol. 97, No. 5 (Dec., 2007), pp. 1824-1839 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/30034586 . Accessed: 21/11/2011 07:10 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]

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Rationalizable Choice Sequentially By PAOLAMANZINI AND MARCO MARIOTTI* A sequentially rationalizable choice function is a choice function that can be retrieved by applying sequentially to each choice problem the same fixed set of asymmetricbinary relations (rationales)to removeinferioralternatives. These concepts translate into economic language some human choice heuristics studied in psychology and explain cyclical patterns of choice observed in experiments. We study some properties of sequential rationalizabilityand provide a full characterization of choice functions rationalizableby two and three rationales. (JELD01).

Cyclical choice is persistently observed in experimental evidence. It typically occurs in simple decision problems (involving only binary comparisons and few alternatives)and in significant proportions, sometimes nearing or even exceeding 50 percent.'This is obviously incompatible with the classical model of rational choice, in which choice is constructedas the maximizer of a single preferencerelation(which we call a rationale), or of a utility function. If a decision maker exhibits cycles of choice over some set of alternatives, for any candidate "best"alternativethere is always anotherone in the set thatis judged betterstill: it is not possible to express a decision maker's preferencesby a utility function, since it is not possible to find * Manzini:Departmentof Economics, Queen Mary,University of London, Mile End Road, LondonEl 4NS, United Mariotti:DepartKingdom(e-mail:[email protected]); ment of Economics, Queen Mary, University of London, Mile End Road, London El 4NS, United Kingdom (e-mail: [email protected]).This paper was previously circulated under the title "Rationalizing Boundedly Rational Choice: Sequential Rationalizability and Rational Shortlist Methods."Most of this work was carriedout while we were visiting Bocconi University in Milan. Their generous hospitality and financial supportthroughfellowships are gratefully acknowledged. We thank the editor, two anonymous referees, Geir Asheim, Sophie Bade, WalterBossert, Robin Cubitt,Eddie Dekel, Marc Fleurbay,OzgurKibris, Michele Lombardi, Vincenzo Manzini, Efe Ok, Ariel Rubinstein, Alejandro Saporiti, Rani Spiegler, Yves Sprumont, Bob Sugden, Koichi Tadenuma, and seminar participants at FUR XII, LSE, McGill University, and the Universities of Oslo, Osnabrueck, Pais Vasco in Bilbao, Sevilla, and Trento for useful comments. The responsibility for any erroris our own. 1 See, e.g., Amos Tversky (1969), Graham Loomes, Chris Starmer,and Robert Sugden (1991), and Peter H. M. P. Roelofsma and Daniel Read (2000). Roelofsma and Read 1824

a maximizer for it. In this paper, we propose and study a family of boundedlyrationalchoice proceduresthat can account for these observed anomalies. In line with some prominentpsychology and marketingstudies (see below), in our model we assume that the decision maker uses sequentially two rationales to discriminate among the available alternatives.These rationales are applied in a fixed order, independently of the choice set, to remove inferior alternatives.This procedure "sequentiallyrationalizes" a choice function if, for any feasible set, the process identifies the unique alternative specified by the choice function. In this case, we say that a choice function is a Rational Shortlist Method (RSM). Intuitively,the first rationale identifies a shortlist of candidatealternativesfrom which the second rationaleselects. The special case in

(2000) find that the majority(52 percent) of choices exhibited binary cycles in a universal choice set of four alternatives. In the experiment carried out in Loomes, Starmer, and Sugden (1991), between 14 percent and 29 percent of choices made by all subjectswere cyclical, and a staggering 64 percent of subjectsexhibited at least one binary cycle in a universalchoice set of just three alternatives.More recent results in this same line are in Pavlo Blavatskyy (2003), who finds that 55 percent of his experimental subjects violate transitivity of choice. Humans seem to fare better than nonhumananimals: for instance, in an experimentof choice behaviorof grayjays, Thomas A. Waite (2001) finds thatall the birdspreferredchoices a to b and b to c, but none preferreda over c, where all alternatives(n, 1) consisted in going and getting n raisins at the end of a Icm long tube, with a = (1 raisin, 28 cm), b = (2 raisins, 42 cm), and c = (3 raisins, 56 cm). Thus, none of the birds exhibited transitive choice; moreover, 25 percent of them exhibited consistently intransitivechoice.

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which the first rationalealways yields a unique maximal element correspondsto the standard model of rationality. A notable aspect of these proceduresis that they are testable based on a "revealed preference" type of analysis that, despite the highly nonstandardchoices to be explained,is not more demanding than the standard one.2 In other words, we ask the following question:when are observed choices compatible with the use of our boundedly rational choice procedure?The answer is: if and only if the choice data satisfy two testableconditions.Of these conditions,one is a standardExpansionaxiom, and the other is a modification of Samuelson'sWeak Axiom of Revealed Preference (WARP).3The simplicity of our tests standsin contrastto the indirectestimationalgorithmsnormallyused (notablyin the marketingliterature)to infer boundedlyrational procedures.4 Typically,RSMs will lackstandardmenu-independence properties,so that it may be possible for an alternativeto be revealedas preferableto anotheralternativein somechoice set, butfor that preferenceto be reversedin a differentchoice set (thus violating WARP).Because of this feature, RSMs can exhibit cyclical patterns of choice; however,they still rule out othertypes of irrational choice. In this sense,an RSM is a nonvacuous notion and this gives it empiricalcontent:it can be tested by observablechoice data. For a simple exampleof how an RSM works, suppose that an arbitratorhas to pick one from the availableallocationsa, b, or c. Suppose that c Pareto dominates a, while no other Pareto comparisons are possible. Assume further that the arbitratordeems a fairerthan b and b fairer than c. The arbitratordecides first on the basis of the Paretocriterion,invokingthe fairness criterion only when Pareto is not decisive. Then, the arbitrator'schoice function y would be such that y ({a, b, c }) = b, since, first, a is eliminated 2 See Hal R. Varian (2005) for a recent survey on standardrevealed preferencetheory. 3 Recall that WARP, in its general form, states that if an alternativea is chosen from some menu of alternatives where some other alternativeb is present (i.e., a is directly revealed preferredto b), then it can never be the case that alternative b is selected from any other menu including both a and b. 4 For recent examples, see, e.g., Michael Yee et al. (forthcoming) and Rajeev Kohli (forthcoming).

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by c using the Pareto criterion, and, second, c is eliminated by b using the fairness criterion. On the otherhand, y ({a, b}) = a, given that the Pareto criterion has no bite, and the arbitrator would select on the basis of fairness. Similarly, y ({b, c}) = b, whereasy ({a, c})) = c by Pareto. This seems an entirely reasonableway for the arbitratorto come to a decision. In fact, this procedure has been proposedin a social choice setting by Koichi Tadenuma(2002). Yet it produces a violation of WARP and pairwise cyclical pattern of choice. One can think of a wide arrayof otherpractical situations where RSMs may apply. A cautious investor comparing alternativeportfolios first eliminates those that are too risky relative to others available,and then ranksthe surviving ones on the basis of expected returns.A recruiting selector first excludes candidateswith lower levels of some desired skills than other applicants he is considering, and then selects based on meritfrom the remainingones. The notion of RSM is relevantalso in other fields in the social sciences. For instance, psychologistshave often heuinsisted on sequential"noncompensatory"5 ristics, as opposed to one single rationale, to explain choices (though axiomatic characterizations of such boundedly rationalprocedures are lacking). Notable in this respect are the "Eliminationby Aspects" procedureof Tversky (1972) and the idea of "fast and frugal heuristics" of Gerd Gigerenzer, Peter M. Todd, and the ABC ResearchGroup(1999). Similarly,this type of model is widely used and documented in the management/marketingliterature.Yee et al. (forthcoming)providerecentand compelling evidence of the use by consumersof "two-stage considerationand choice"decision-makingprocedures, and also refer to firms taking account of this fact in productdevelopment. In summary, RSMs are simple boundedly rational procedures that are introspectively plausible and can explain empirically relevant "anomalies" of choice patterns. Above all, whether the choice pattern of a decision makercan be explainedby an RSM is a testable hypothesis. Last but not least, RSMs provide rigorous formal underpinningsto the heuristics

5 That is, in which the several "criteria"used for choice cannot be tradedoff against each other.

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approachcentral to much psychology and marketing literature. In additionto providinga characterizationof RSMs, we considera naturalextension whereby the decision maker applies sequentially more than two rationales, much in the same way as they are used in the elimination procedure described before for RSMs. We call choice functions recoverable in this way sequentially rationalizable. Although a full characterization of sequentially rationalizablechoice functions remains a nontrivialopen problem,we are able to present some partial results, notably including a full characterizationof rationalizability by three rationales.Interestingly,even when the number of rationales allowed is unboundedly large, not all choice functions are sequentially rationalizable. The rest of the paper is organized as follows. In the next section we define and characterize RSMs. In Section II we extendRSMs to sequential rationalizability. Section III presents an applicationto choice over time. We conclude in Section IV. Some technical examples are in the Appendices. I. RationalShortlistMethods A. Basic Definitions Let X be a set of alternatives,with IXI> 2. Given S C X and an asymmetricbinaryrelation P C X X X, denote the set of P-maximal elements of S by max (S;P) = {x E S/7y E S forwhich(y,x) E P}. Let P (X)denote the set of all nonemptysubsets of X. A choice function on X selects one alternativefrom each possible elementof P (X), so it is a function y : P (X) -- X with y (S) E S for all S E P (X). We abuse notationby often suppressingset delimiters,e.g., writing y (xy) in place of y ({x,y}). The main result in this section (Theorem 1) goes through (as can be easily checked by an inspection of the proof) whetherthe choice sets S are finite or not. For simplicity of notation, however,we confine ourselvesto the case where Xis finite. Since Paul A. Samuelson's (1938) paper, economists have sought to expresschoice as the

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outcome of maximizing behavior. Formally, a choice functiony is rationalizableif thereexists an acyclic binaryrelationP, such that {-y(S)} = max (S;P) for all S E P (X). The main new concept we introduce is the following. DEFINITIONI: A choice function y is an RSM wheneverthereexists an orderedpair (P,, P2)Of asymmetric relations, with Pi C X X Xfor i = 1, 2, such that: {y(S)} = max(max(S; P,1);P2)forallS E P (X). In that case we say that (P1,P2) sequentially rationalizey. Wecall each Pi a rationale. So the choice from each S can be represented as if the decision maker went through two sequentialroundsof elimination of alternatives. In the first round, he retains only the elements that are maximal according to rationale P1. In the second round, he retains only the element that is maximal according to rationaleP2: that is his choice. Note that, crucially, the rationales and the sequence in which they are applied are invariantwith respect to the choice set. This choice procedure departs from (standard) rationalchoice only when the relationP1 is incomplete.The relationP2 may or may not be complete, though it needs to be decisive on the shortlistcreatedafter the first roundof elimination, i.e., select from it a single element. B. An Example To glean some intuition on what RSMs can and cannotdo, let us consideran examplewhere two types of "pathologies of choice" are displayed. We show in the next section that the decomposition of pathologies illustratedin the example is very general;of these, only one can be accommodatedby an RSM. Suppose thatthe decision makercan conceivably choose among three alternativeroutes to go to work, A, B, and C. Because of periodic road closures, we can observe his choices also between subsets of the grandset {A,B, C}. Up to a relabellingof the alternatives,it is not difficult

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to check that there are only three possible configurations of choice behavior. Fix the route that is taken when all are available,say routeA. Then, consider the situation when, at any one time, only two routes are available. Those that follow exhaust all possible choices:6 Case 1 (Dominance of the best route).Route A (the choice from the grand set) is also taken whenever only one other route is available, regardless of the choice when A is not available. Case 2 (Pairwise cycle of choice).-Route A is taken when B is the only otheravailableroute; route B is taken when C is the only other available route;route C is taken when A is the only other availableroute. Case 3 (Default route).-Some route different from A is always taken when only one other route is available,regardlessof the choice when A is available. These cases are depicted in Figure 1, where arrowspoint away from the selected routeto the rejectedone in pairwise choice. Case 1 can be rationalized in the standard way, with only one transitivepreferencerelation such thatA is preferredto both B and C. Case 2 is pathologicalfrom the point of view of standardeconomic rationality.Nonetheless, it can be sequentiallyrationalizedby two rationales-let us call them "traffic"and "length"as follows. The decision maker prefers less traffic to more, and prefers shorter routes. Route C is shorter than Route A, and Route A is shorterthan route B. Route B has less traffic

6 Let XtYdenote "routeX is taken when route Y is also available."Then, it is easy to see that, once we fix the route selected when all are available, there are eight possible combinations of routes chosen in each of the three possible pairwise comparisonsbetweenA and B, A and C, and B and C, namely: (1) AtB, AtC, andBtC; (2) AtB,AtC, and CtB;(3) AtB, BtC, and CtA;(4) BtA,AtC, and CtB;(5) BtA, BtC, and AtC; (6) BtA, BtC, and CtA;(7) CtA, CtB, and AtB; and (8) CtA, CtB, and BtA. Of these possibilities, (1) and (2) correspond to Case 1 in the text; (3) and (4) are the same, subject C, and correspondto Case to relabelling by switching B annd 2 in the text; and, finally, both (5) and (7), and (6) and (8) are the same subject to swappingB for C, and correspond to Case 3 in the text.

B

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C C

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A

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Case 3a

Case3b FIGURE

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than route C, but trafficcomparisonsare hardto make between other routes.The decision maker looks firstat trafficto eliminate routes,and then at length. It is immediate to see that the criteria applied in the given sequence generate the choice behaviorof Case 2. In Case 3, a different pathology of choice is observed. There is one route, say B to fix ideas, that is revealed preferred in pairwise choices to all other routes, yet it is not chosen when all routes are available (as in Figure 1, Case 3a). This pattern of choice is not an RSM. To see this, suppose to the contrary that this were an RSM, again with rationales "traffic" and "length" applied in that order. If so, the fact that B is chosen in pairwise comparisonover A means that if B andA are comparableby traffic, then B has less trafficthanA. Otherwise,B must be shorterthan A. Similarly, since B is chosen in pairwise comparisonover C, eitherB has less traffic than C, or is shorter(or both). But then, when all three routes are available,B can never be eliminated by either the traffic or the length criterion.This contradictsthe initial hypothesis that the choice was an RSM. We shall see later that this reasoning can be generalized to more complex cases, and in fact it would stand even if the numberof possible criteriawere not limited

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to two. It is this type of pathological behavior that gives our theory empiricalcontent. C. Characterizationof Rational ShortlistMethods In general, suppose that we observed the choices of a decision maker. How could we test whether his behavior is consistent with the sequential maximization of two rationales? Surprisingly,it turns out that RSMs can be simply characterizedthrough two familiar observable propertiesof choice. Recall, first, the standardWARP pioneered by Samuelson (1938) for consumertheory. WARP: If an alternative x is chosen when y is available, then y is not chosen when x is available. Formally,for all S, T E P (X):[x = y (S), y E S, x E T] = [y f y(T)]. It is well known that (in the present setting) WARP is a necessary and sufficient condition for choice to be rationalizedby an ordering(i.e., a complete transitive binary relation).7WARP essentially asserts the absence of a certain type of "menu effects" in choice: if an alternative is revealed preferred to another within a certain "menu"of alternatives,changing the menu cannot reverse this judgement. The property we introduce allows menu effects, but requires some consistency in the way they operate. It is in the following spirit: if you are observed to choose steak over fish when they are the only items on the menu, and also when a large selection of pizzas is on the menu, then you do not choose fish over steak when a small selection of pizzas is on the menu. A pairwise preference for x over y does not exclude in principle that in larger menus some reason can be found to reject x and choose y instead. However, if a large menu does not contain any such reason, no smaller menu contains such a reason either. Althoughthis propertymay look introspectively plausible,here we are not interestedin issues of plausibility:we simply propose this propertyas an observabletest for the RSM model.

7See, e.g., Herv6 Moulin (1985) and Kotaro Suzumura (1983).

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WEAK WARP: If an alternative x is chosen both when only y is also available and when y and other alternatives{z1,..., ZK}are available, then y is not chosen when x and a subset of {zl ..., ZK}are available. Formally,for all S, T (X): [(x,y} C S C T,x = y(xy) = y (T)] E =4 [Y y (S)]. The second propertywe use in our characterization is called Expansion,and it directlyrules out pathologiesof the type consideredin Case 3 of the routeexample above. EXPANSION:An alternative chosenfrom each of two sets is also chosen from their union. Formally,for all S, T E P (X):[x = y(S) = y(T)] = y(S U T)]. =[x Our main result can now be stated as follows. THEOREM 1: Let X be any (not necessarily finite) set. A choice function y on X is an RSM, if and only if it satisfies Expansion and Weak WARP. PROOF: Necessity: Let y be an RSM on X and let P, and P2 be the rationales. (a) Expansion.Let x = y (S) = y (T7')for S, T E P (X). We show that for any y E S U T, it cannot be (y,x) E P,, and for any y E max (S U T; P,), it cannotbe (y,x) E P2. If(y,x) E P1, this would immediatelycontradictx = y (S) or x = y (T) and y being rationalized.Suppose,now, that for some y E max (S U T; P,) we had (y, x) E P2. Since max (S U T; Pe) C max (S; P1) U max (T; P,), we havey E max (S;P,) ory E max (T; P,), contradictingx E max (max (S;P,); P2) or x E max (max(T;P,); P2). Therefore,x survivesboth roundsof elimination and we can concludethatx = y (S U T).8

8 Note that this argument cannot be iterated further in the case of more than two rationales.For any set S E P (X), let M1(S) = max (S; P1) and M2(S) = max (max (S; P1); P2). Then, observe that it is not necessarily true that M2(S U T) C M2(S) U M2(T).There could, in fact, be y E (M1(S) U M1 (T))\MI (S U T) such that (y,z) E P2 for some z E M1(S) U M1(T), while for ally' E M1 (SU T) it is the case that (y',z) B P2. So, if it were (z,x) E P3, x could not be chosen from S U T.

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(b) Weak WARP. Let x = y (xy) = y (S), y E S. Then x = y (xy) implies that (x,y) E P1 U P2. If (x,y) E P1, then the desired conclusionfollows immediately.Suppose,then, that (x,y) E P2.The fact thatx = y (S) implies thatfor all z E S it is the case that(z,x) 6 P1. Therefore, x E max (R; P1)for all R CS for which x E R. Since (x,y) E P2, then y 6 max (max (R;P1); P2)for all such R, and thusy # y (R). Sufficiency: Suppose that y satisfies the axioms. We construct the rationales explicitly. Define P1 = {(x,y) E X XX Ithereexists no S E such thaty = y (S) andx E S}.

(X)

Define (x,y) E P2 if and only if x = y (xy). Observe that P1 and P2 are asymmetric:if (x, y) E P1 and (y, x) E P, then, in particular,y (xy) x,y, which is not possible; and P2 is cOn: with the sistent binary choices. To check thatP, andP2rationalizey, take any S E P (X)and let x = y (S). First, we show that all alternativesthat are chosen over x in binary choice are eliminated in the firstround.Second, we show thatx survivesboth rounds, and that it eliminates all remainingalternativesin the second round. Let z E S be such thatz = y (xz). Supposeby contradictionthat for all y E S\z there exists Tyz 3 y, z such that z = y (Tyz).Then by Expansion z = y (UyEs\z If S = UyEs\z we have an Tyz). Tyz immediate contradiction.If S C Uyes\z Tyz,by Weak WARP x 4 y (S), a contradiction.Thus for all such z there exists y E S such that (yz, z)E P,. Clearlyx is not eliminatedby eitherP1 or P2: for yE S, if (y,x) E P,, then, it could not be x = y (S), whereas if (y,x) E P2 by the argument in the previous paragraph,y would have been eliminated by the applicationof P1 before P2 can be applied. Finally for all z E max (S, P1), with z - x, such thatx = y (xz), we have (x,z) E P2. As discussed above, the strength of this characterization lies in the fact that it connects what would be traditionally considered highly "irrational"choice patterns to easy-tocheck rationality properties. The only relaxation from standardtests is to allow a limited

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form of menu-dependence in the Weak WARP axiom. In Appendix A, we establish by means of examples that the set of axioms in Theorem 1 is tight. REMARK 1: There isn't a unique way to construct the rationales. One algorithm that performs the task is the following: (i) if an alternativex is never chosen when y is present, then assign (y,x) to thefirst rationale P1;(ii) ifx "beats"y in pairwise comparison, then assign (y, x) to the second rationale P2.9 Theorem 1 can be extended to choice functions on any subdomainC C P (X). The following property,which we use to this effect below, combines in a single propertyWeakWARP and Expansion. WWE: If x = y (Si) in a class and x = y (xy), then y # y (R) for all R E P (X) with {x, y} C R C Ui Si. WWE says thatif you choose pizza over steak when only pizza and steak are available, then you don't choose steak from a menu containing pizza and some other items, all taken from menusfrom which pizza is chosen. The previous RSM characterizationin terms of Expansion and Weak WARP may not work on restricted domains due to the possible lack of closure under set union of these domains.'0However, WWE solves this difficulty.For any subdomain SCP (X), we referto a function y : I -+ X as a choice function on C. By following essentially the same argumentof the proof of the main theorem, it is easy to show the following.

9 Note that in this construction there is a one-to-one relationshipbetween violations of WARP and differences between the two rationales. In fact, if (x,y) E P1, then clearly, by definition, (x,y) B P2 Therefore,the only possible difference between the two rationales is when there are two alternativesx and y such that (x,y), (y,x) f P, and (x,y) 6 P2. This is a violation of WARP.We are grateful to a referee for pointing this out to us. h To be more precise, we may not be able to carry out the step in which we assert that since y = y (T,) for a class of sets {Tz},then y = y (Uz Tz), since Uz Tzmay not be in the domain.

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COROLLARY 1: A choice function y on C P (X) is an RSM if and only if it satisfies WWE. To conclude this section, we note that, were one to allow a decision makerto applytwo rationales in a variableorder,dependingon the problem, then many more choice functions could be rationalized. In other words, it would be interesting to consider the following definition. Say that a choice function y is a menu dependent RSM if there exists a pair of rationalesP1, P2 such that {y (S)} E {max (max (S; P,); P2), max (max (S; P2); P1)} for all SE C. We do not know at presentwhich choice functions can be rationalizedin this way. We recall the result by Gil Kalai, Ariel Rubinstein,and Rani Spiegler (2002), in whose model one single rationalizingrelation is used on each choice set, but the relation may vary from one choice set to another.Each relationis assumed to be an order (so it is complete and transitive),and several relations are in general needed to rationalizea choice function. II. BeyondTwoRationales A. Sequential Rationalizability The concept of an RSM suggests an immediate generalization. Instead of using only two rationales,the decision makermight use a larger numberof them. For example, in the routes scenario of the previous section, one can conceive thatthe decision makeruses not only trafficand length, but also scenery, as criteria for choice. This leads us to the following definition. DEFINITION2: A choice function y is sequentially rationalizable whenever there exists an ordered list P1,..., PKOfasymmetric relations, with Pi C X X Xfori = 1...K, such that, defining recursively,

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Mo(S) = S, Mi (S) = max (Mi-, (S; Pi)), i = 1 ..., K, we have {y (S)} = MK(S)for all S E P (X). In that case, we say that(P1... ,PK)sequentially rationalize y. Wecall each Pi a rationale.If we want to emphasizethefact that no more than K rationales are needed, we call the choice function K-sequentially rationalizable. So the choice from each S can be constructed through sequential rounds of elimination of alternatives. At each round, only the elements that are maximal according to a roundspecific rationalesurvive.Like for RSMs (which can now be viewed as special sequentiallyrationalizable choice functions where only two rationales are used), the rationalesand the sequence are invariantwith respect to the choice set. Are there choices that are not sequentially rationalizable?At first sight, it may seem that if we are free to use as many rationalesas we like, any choice can be rationalizedby a sufficiently large numberof rationales.On the contrary,the answer may be negative even for very simple choice functions (on a domain X with as few as three alternatives).Examples are provided in Appendix A. B. Violationsof Economic RationalityAre of Only TwoTypes To delve deeper into the notion of sequential rationalizability,let us recall anotherwellknown propertyof choice. Independence of IrrelevantAlternatives.-1" If an alternativeis chosen from a set, it remains chosen when some rejected alternativesare discarded from the set. Formally, for all S, T E P (X):[y (T)E S, SC T] - [y (S) = y(T)]. Recall that,atleast for the finitecase, Independence of IrrelevantAlternativesis equivalentto

l For single-valued choice functions, this conflates several properties of correspondences such as Chernoff's

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WARP and therefore is a necessary and sufficient conditionfor rationalizabilitywith a single ordering.12 What types of boundedly rational behavior does sequential rationalizabilityallow? To answerthis question considerthe following two very basic rationalityrequirements.The firstone requiresthat if an alternative"beats"all others in a set in binarychoices, then this same alternative is chosen from the set-this is obviously a weakening of Expansion.The second property requires that there are no pairwise cycles of choice-this is a weakeningof Independenceof IrrelevantAlternativesand WARP: Always Chosen.-If an alternativeis chosen in pairwise choices over all other alternativesin a set, then it is chosen fromthe set. Formally,for all S E (X): [x = y (xy) for all y E S\x] y [x = (S)]. No Binary Cycles.-There are no pairwise cycles of choice. Formally, for all x, ..., xn+, E X:[y(xixi+l) = xi, i = 1,..., n] = [x, = y (xxln+,)].

The reason for highlightingthese two properties is that the class of choice functions that do not satisfy WARP (i.e., that are not rationalizable by a single standardeconomic preference relation)can be classifiedvery simply. They are partitionedinto just three subclasses:the choice functions that violate exactly one of No Binary Cycles or Always Chosen,and those that violate both. This is established in the Proposition 1, which is of independentinterest.

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Suppose that x = y (X) and y = y (xy), so that Independenceof IrrelevantAlternativesis violated. There are two possibilities: if y = y (yz), then Always Chosen is violated;if, instead, z = y (yz), then eitherAlways Chosen is violated (if z = y (xz)), or No Binary Cycles is violated (if x - y (xz), so that x = y (xz), z = y (yz), y = y (yx>)). Assume now that the statementholds for all sets X with XJ n. Take X' such that IX' = - x = y (X') but there exists n + 1. Suppose that {x,y} C S C X' such that y = y (S). If the restriction of y to S violates Independence of IrrelevantAlternatives, then the result follows by the inductivehypothesis. Suppose, then, that the restrictionof y to S satisfies Independence of IrrelevantAlternatives.Considerthe set V = X'\S. Obviously,V l0, and let z = y (V). If the restrictionof y to V violates Independence of IrrelevantAlternatives,then the result follows by the inductive hypothesis. Suppose it satisfies Independenceof IrrelevantAlternatives. Then, z = y (vz) for all v E V\~z. Suppose that z = y (yz). If z = y (sz) for all sE S, then Always Chosen is violated. If there exists some tES such that t = y (tz), then this generates the cycle t = y (tz), z = y (yz), y = y (ty), where the last relationfollows from Independenceof IrrelevantAlternativeson S. Suppose, alternatively,that y = y (yz). If y = y (sy) for all s E V, then Always Chosen is violated. If there exists some t E V such that t = y (ty), thenthis generatesthe cycle t = y (ty), y = y (yz), z = y(tz), wherethe last relationfollows from Independence of IrrelevantAlternatives on V.

PROPOSITION1: A choice function that violates WARPalso violates Always Chosen or No Binary Cycles.

C. SequentialRationalizabilityExcludes One Typeof IrrationalBehavior

PROOF: It is easier to conduct the proof in terms of Independence of IrrelevantAlternatives rather than the equivalent propertyWARP. Let y be a choice function on X. We argue by induction on the cardinality of X. Let X - {x,y,z}.

Next, we show that sequentialrationalizability restrictsviolations of the two basic rationality propertiesintroducedin this section.

y (S)) and Arrow's condiproperty (S C TT= y (T) n S tion (s c T, y (T) n S 0 = y _(S) = y (T) n S). 12 See, e.g., Moulin (1985) and Suzumura(1983).

LEMMA 1: Ifa choice function is sequentially rationalizable, it satisfies Always Chosen. PROOF: Let y on X be sequentiallyrationalizableby the rationalesP,, P2... PK. For any two alternatives

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a,b E X, let i(a,b) be the smallest i such thatPi relates a and b, that is

i (a, b) = min {i E {1, ..., K} I(a, b) E Pi or (b,a) E Pi}. Given S C X and x E S, let x = y (xy) for all y E S\x. For each y E S\x, we must have (x,y) E Pi(x,y),so thatthe successive applicationof the rationaleseliminates all y E S\x, and no rationale can eliminate x. Therefore,x = y (S), as desired. Our partial characterizationresult shows the equivalenceof WARP and No Binary Cycles on the domain of sequentiallyrationalizablechoice functions; it follows from Proposition 1 and Lemma 1 by observing that WARP is violated if there is a binary cycle. THEOREM 2: A sequentially rationalizable choice function violates WARP,if and only if it exhibits binary cycles. Thus, the results in this section generalize the message of the basic "routes"example of the previous section. We have established that, in general, and not only in that example, all violations of "rationality"can be traced back to two elementarypathologiesof choice, corresponding to Case 2 and Case 3 of the routesexample:violations of Always Chosen andNo BinaryCycles. Like RSMs, even the more general notion of sequential rationalizability is intimately connected with pairwise cycles of choice, and cannot possibly explain the otherpathology. D. A RecursionLemma In this section and the next, we provide conditions on observablechoices that fully characterize 3-rationalizablechoice functions. In the course of doing this, we also provide a recursive result that permits one to move from any given characterizationof(K - 2)-rationalizable choices to K-rationalizable choices, thus providing a basis for a general characterizationof sequentialrationalizability. To this aim, we need to extend some of the previous definitionsto choice correspondences.

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A choice correspondence on X selects a set of alternatives from each possible element of P (X): so it is a set-valuedmap y : P (X) - X with y (S) C S for all S E P (X). The definitions of sequentialrationalizabilityand RSM extend in the obvious way. Any choice correspondencey on X defines naturallya subdomain1 (y), definedas follows: S(y)= {S E P(X): S= y(T) for some TE

(X)}.

In words, I (y) contains all the sets in the full domain P (X)that coincide with the choice that y produces from some element of the full domain. Now we are readyto state our key result. RECURSION LEMMA: A choice function y is K-sequentially rationalizable, if and only if there exists a (K - 2)-sequentially rationalizable choice correspondencey' on X such that: (i) y (y*(S)) = y (S) for all S E (ii) the restriction of y to WWE.

(X); (y*) satisfies

,

This resultshows that the process of selection for a sequentiallyrationalizablechoice function y can be recursivelybrokendown into two steps. First,a sequentiallyrationalizable"preselection" is made, described as a choice correspondence y'*which containsthe chosen alternativefor each set. This choice correspondenceis sequentially rationalizable with two fewer rationales than the given choice function. In the second step, a choice function is applied to the preselected sets. This choice function satisfiesWWE on that domain and is just the restriction of the given choice function y to the preselected sets. PROOFOF THE RECURSIONLEMMA: Let y be K-sequentially rationalizable by P, ..., PK. The sequential application of P1,...,PK-

2 defines a (K -

2)-sequentially

rationalizable choice correspondence on X, say~y. It must be y (y*(S)) = y (S) for all S E P (X), since boththe left-handside andthe righthand side are obtained by applying exactly the same rationales, exactly in the same sequence. The restriction of y to I is an RSM with ('*) definitionof I rationalesPK-1 and PK,since by

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MANZINIAND MARIOTTI:SEQUENTIALLY RATIONALIZABLE CHOICE

(y*) the first K - 2 rationalesproduceno effect when applied to any element of I (y*) (as they have alreadybeen used), and only the rationales PK-1 and PK will be effective. Then the statement follows by Corollary1. That y is sequentially rationalizable(say by ..., PK)if the conditionsof the statementhold P1 is obvious: the first K - 2 rationales are those that rationalize y*, while PK- 1 and Pk are the rationalesthat rationalizethe restrictionof y to I (Y*). The RecursionLemmais useful as an observable test for sequential rationalizability,provided one also has observable conditions that characterize sequential rationalizability of a lower orderfor choice correspondences.In general, we still lack such conditions for general correspondences,exceptfor the case where y* is rationalizableby just one rationale,as shown in the next section.

(ii) the restriction of y to WWE;

I

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(y*) satisfies

(iii) y* satisfies binariness. PROOF: The result follows directly from Corollary 1 and Sen'stheorem,with one observation.If there is aP as in Sen's theorem (necessarilycomplete since y (xy) is well defined for all x,y E X), then there is an asymmetric relation P' such that (y, y(S)) E P' for no SlE P (X)and y E S (i.e., y maximizes P'). The relation P' is just the asymmetricpart of P.

This result provides a characterizationof 3rationalizabilityexclusively in terms of conditions on observed choice. It involves checking an axiom of the standardexpansion-contraction type for a set of choice functions rather than just for the original one. In practice, the result defines an algorithm that uses the choice data providedby y, as follows: E. A Characterizationof 3-Rationalizability Step 1: Considerall the possible choice correspondences y* defined only on binary sets, and A classical result of choice theory uses the such that y (xy) E y* (xy) for all x, y E X. condition on choice following correspondences Step 2: Fix a - from step 1, extend it to P (X) (if possible), with the following formula: x E (e.g., Moulin 1985; Suzumura1983). y*(S), if and only if x E y*(xy) for all y E S\x, and y (S) E y* (S). If the extension is not posBinariness.-For all S E P (X) : x E y (S), if sible (i.e., it yields an empty set), pick a different and only if x E y (xy) for ally E S. Binariness says that an alternativeis chosen y* from step 1, and repeat. from a set, if and only if it is chosen in binary Step 3: Check if y on l (y*)satisfiesWWE. If it does, move to step 4. If not, repeatstep 2 with contests with any other alternative in the set. This means that the choice function is detera differenty*. mined entirely by its behavior on binary sets. Step 4: Check if y (y*(S)) = y (S) for all S E P (X). If it does, the original choice funcAmartya Sen (1970) provedthat a choice corretion is 3-rationalizable.If not, repeatstep 2 with spondencey on P (X)is rationalizedby a binary relationP, if and only if y satisfies binariness.13 a different y. If the answer is negative for all Thanks to this fact, we can "solve"the case of choice correspondences,thenthe originalchoice function is not 3-rationalizable. 3-rationalizability. An example of an application of this algoTHEOREM3: A choicefunction y is 3-sequenrithm, also illustratingsome practicalshortcuts, is given in Appendix B. tially rationalizable if and only if there exists a choice correspondencey* on X such that: III. RationalShortlistMethodsand (i) y (y*(S)) = y (S)for all S E P (X); ChoiceoverTime

'3 That is, for all S E P (X), y (S) = {x ES : (x,y) E P for all y E S}.

Throughoutthe paper,we havefocused on generalviolationsof rationality.However,we believe thatRSMs can provevery useful to explainother

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choice anomalies in specific contexts, in which certain rationalescan suggest themselves.Here, we consideran applicationto choice over time. The standard model of choice over time is the exponential discounting model. It has been observed that actual choices in experimental settings consistently violate its predictions. The most notable violation is possibly preference reversal.Let P, refer to observed pairwise choices over date-outcomepairs (x, t) E XX 'T, where X is a set of monetaryoutcomes and T is a set of dates. In this context, preferencereversal is the shorthandfor the following situation: (x, tx) P (Y,ty) and(y, t, + t) P, (x, tx+ t). This violates stationarityof time preferences,a premise on which the exponentialdiscountingmodel is constructed. This choice pattern can be easily accounted for by interpretingy as an RSM with rationales P1 and P2 defined as follows. For some function u :XX T-+ R andnumbero- >0,(x, tx)Pl(y,ty), if and only if u(x, tx) > u(y, ty) + a, and (x, tx)P2(y,ty), if and only if u (y,ty) t u (x, tx) t u (y,ty) + and eitherx > y, or x = y and tx < al ty.That is, the decision maker looks first at discounted value, and chooses one alternativeover the other if it exceeds the discounted value of the latter by an amountof at least o-.Otherwise he looks first at the outcome dimension and, if this is not decisive, at the time dimension. This is compatible with preferencereversal, even with an exponential discounting type of u function. Let x < y, tx < t, and u (x, tx) = xSt for 8 E (0, 1). Suppose that x8t > y8t"+ a so that (x, tx) is chosen over (y,ty) by applicationof P,. Given a, if t is sufficientlylarge it will be x8ts+t < ySt,+ + oa, so that the two date-outcome pairs (x, tx + t) and (y,t, + t) are not comparable via P,. However,the applicationof P2 yields the choice of (y,t, + t) over (x, tx + t), thus "reversing the (revealed)preference." Obviously, P, could also be sequentially rationalizedby using three rationales,where the outcome and time dimension comparisons are used in two separatePi. The same model can explaincyclical intertemporalchoices andother"anomalies"(see Manzini and Mariotti 2006a, and bibliographytherein, notablyRubinstein2003, who proposesa multistage procedurebased on similarityrelations). Our model differs from that in Efe A. Ok and Yusufcan Masatlioglu (forthcoming),who

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consider a complete binary preferencerelation B over a set of date-outcome pairs. They axiomatize the following representationclass: (x, t) B (y,s), if and only if U (x) U (y) + 4 (s, t), utilwhere U is interpretedas an instantaneous ity function, while p capturesthe effect of time delay. Unlike our setup, this representationis not an intervalorder,and the "contributions"of outcome and time to the agent'sutility are separated. In Ok and Masatlioglu'sapproach,cycles can be accountedfor without resortingto a second partial order.Our view is different:the first partial order represents the "rational"though incomplete component of decision making; hence we assume it transitive.In our approach, intransitivitiesarise as the by-productof resorting to the "tie-breaking"second rationale. IV. ConcludingRemarks We have proposed an economic, "revealed preference"approachto the type of decisionmaking procedures often promoted by psychologists. For example Gigerenzer and Todd (1999) in their work on "fast and frugal" heuristics observe, "One way to select a single option from multiple alternatives is to follow the simple principle of elimination: successive cues are used to eliminate more and more alternatives and therebyreduce the set of remaining options, until a single option can be decided upon."Such heuristicsfocus mostly on the simplicity of cues used to narrow down possible candidates for choice. Simplicity is an essential virtue in a world in which time is limited. An overarching preference relation-let alone a utility function-is not a cognitively simple object, and as a consequence these authors stress the difference from heuristics-basedreasoning and the "unlimited demonic or supernaturalreasoning"relied upon in economics.14 Yet, in this paper we have shown that the standard tools, concepts, and propertiesof revealed preferencetheory can be used to formalize and infer the use of such heuristics. A seemingly limited form of menu-dependence (encapsulated in our Weak WARP and Expansionproperties) is equivalent to the use of a two-stage

14See Gigerenzerand Todd (1999).

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MANZINIAND MARIOTTI:SEQUENTIALLY CHOICE RATIONALIZABLE

procedure that may generate economically "irrational"choice behavior. Ourway of incorporatingboundedrationality is to translatethe psychologicalnotion of "cues" into a set of not necessarilycompletebinaryrelations. Rationality for us is the consistent application of a sequence of rationales.The orderin which they are applied may be hardwiredand may depend on the specific context and on the type of decision maker,1"but it should be the same in a relevant class of decision problems. Each single rationale in itself need not exhibit any other strongproperty,such as completeness or transitivity. The usefulness of elimination heuristics in practical decision making is self-evident16and widely spread in disparatefields, from clinical medicine"7to marketingandmanagement.In this perspective,the sequentialityin the application of rationales,which lies at the core of our analysis, is an appealingfeatureof our rationalization results. Our approachmay be contrasted with the recentcontributionby Kalai, Rubinstein,and Spiegler(2002) and Jos6Apesteguiaand Miguel A. Ballester(2005). They use multiplerationales to explain choices, but each rationaleis applied to a subset of the domainof choice. This results in all choice functions being rationalizable,and the focus becomes that of "counting"the minimum numberof rationalesnecessary to explain choices. One could imagine adapting a similar approachin our framework,by making the order of application of the rationales dependent on the set to which they are applied. Whetherthis would reducethe numberof rationalesneeded to explain choices is still an open problem. 15 For example, in orderto "choose" whether to stay or flee in the presence of a bird, a rabbit may use as its first rationalethe fact that the birdis gliding, which would identify a predator.Conversely, a human decision maker may well look first at size or shapein orderto recognize the bird. 16 As put very effectively by Gigerenzerand Todd(1999), "If we can decide quickly and with few cues whether an approachingperson or bear is interested in fighting, playing, or courting, we will have more time to prepareand act accordingly (though in the case of the bear all three intentions may be equally unappealing)." 17As an example, the online self-help guide of the UK National Health Service (http://www.nhsdirect.nhs.uk/ SelfHelp/symptoms/) helps users recognize an ailment by giving yes/no answers along a sequence of symptoms. This presumablyformalizes the mental process of a trained doctor.

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A different and intriguing approach to the theme of "simplifying"choice problemsis pursued by Yuval Salant (2003), who shows how a rationalchoice function can be viewed as being minimally complicated from a computationaltheoreticpoint of view. Recently, Rubinsteinand Salant (2006) have also discussed the use of the revealedpreference approach to explain "behavioral"phenomena, and they providean alternativecharacterization of RSMs in a differentframework.In this same spirit, Masatlioglu and Ok (2003) characterize the phenomenon of status quo dependence in terms of axioms on observable choice data. And Kfir Eliaz and Ok (2006) weaken WARP for choice correspondencesto characterizethe rationalization by a not necessarily complete preferencerelation.'8 In Manzini and Mariotti(2006b), we consider a two-stage elimination procedurein which, in the first stage, the relation is applied to sets of alternativesinstead of to the alternativesthemselves. The interpretationis that,in the firststage, alternatives are grouped by "similarity" and the elimination is between "similaritygroups." Interestingly,that procedureis characterizedby Weak WARP alone, and thereforeit can explain even those choices that violate Always Chosen, besides exhibitingpairwise cycles.'9 We should also mention the work by Ok (2004), which characterizes the choice correspondencessatisfyingIndependenceof Irrelevant Alternativesby means of a two-stageprocedure. Unlike this paper, in the second stage of Ok's procedure,elimination of alternativesdoes not occur on the basis of a relation,but ratheron the informationcontainedin the entirefeasible set. To conclude, we observe that recently Lars Ehlers and Yves Sprumont(2006) and Michele

18They propose the following Weak Axiom of Revealed Non-Inferiority(WARNI): for any y E S, if for every x E y (S)there exists a choice set T such that y E y (T)and x E T, then y E y (S). They prove that WARNI is equivalent to rationalizationby a single but possibly incomplete preference relation. Our WEE seems reminiscent of WARNI. As Case 2 of the route example shows, however, there are (single-valued) choice correspondencesthat satisfy WWE but violate WARNI:so, not all RSMs can be rationalizedby a single and possibly incomplete preferencerelation. 19 We also present experimental evidence to show that this type of choices is empirically relevant in certain contexts.

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Lombardi (forthcoming)have studied rationalization of choice functionsby a tournament.The first two authorsuse expansion-contractionaxioms to characterize (necessarily multivalued) choice functions, which are the top cycle of the tournament, where the tournament coincides with the base relation. Lombardi (2006) characterizes choice functions which are the uncovered set of the tournament.One can show that sequentially rationalizable choice functions refine the top cycle (of the base relation)in each choice set. In other words, a sequentiallyrationalizablechoice functionpicks an elementof the top cycle, so thatthe choice beats in an arbitrary numberof steps any otherfeasible alternative.

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X

W

Y

Z FIGURE 2

Example 2. WeakWARP but not Expansion: X = {x,y,z}

APPENDIX A We establish by means of examples that the set of axioms in Theorem 1 is tight. In orderto describe choice functions compactly in examples, we use the following notation:given x E X, let C, (x) = {S E (X) x = y (S)}.20 Example 1. Expansionbut not Weak WARP: X = {x,y,w,z} C (w) ={wx} C, (x) = {xy,xzxyz, xyz, wxy,wxyz} C, (y) = {wy,yz,wyz} C (z) = {wz,wxz} Binary choices are visualized in Figure 2, where a -~ b standsfor a = y (ab). It is straightforwardto verify that this choice function satisfies Expansion, but not Weak WARP (e.g., x = y (X) and x = y (xz)but z = y (wxz)). This choice function is not an RSM. To see this, suppose (w,x) E P1.Then x = y (X)cannotbe rationalized. Suppose, then, that (w,x) E P2. Then z = y (wxz) cannot be rationalized, for x will eliminate z regardlessof whether(x, z) E P2 or (x,z) E P1. 20 In this notation,the Expansionaxiom says that, for all x E X, C, (x) is closed under set union.

C,(x) = {xy,xz}

C (y) = {yz,xyz} C,(z) = {0} Binary choices are visualized in Figure 3. While this choice functionsatisfiesWeakWARP (trivially,as the premise of Weak WARP does not apply),it fails Expansion.This choice function is not an RSM. Indeed, it is not sequentially rationalizable.As before, for any two alternatives a,b E X, let i(a,b) be the smallest i such that Pi relates a and b. Suppose by contradiction that y were sequentially rationalizableby P1 ..., PK. Since x = y (xy), it must be (x,y) E Pi(x,y).Given this, y = y (xyz) can hold only if (z,x) E Pi(x,z),which contradictsx = y (xz). The examples above can be used to make two additional points. First, there are choice functions that are not RSMs but are sequentially rationalizable.Namely, y in Example 1 is 3-rationalizable,as shown in Appendix B. Second, the notion of sequential rationalizability is not vacuous, in the sense that there exist choice functions thar are not sequentiallyrationalizable (Example2).21

21 The violations of Always Chosen shown in this example appearin othernotableexamples of plausiblechoice procedures introducedin the literature,which are thereforenot sequentially rationalizable.Let X = {x,y,z}, and consider the following refinementof the choose the median procedure: There is a "fundamental"order B on X (e.g., given by ideology from left to right) such that (z,y), (y,x) E B.

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MANZINIAND MARIOTTI:SEQUENTIALLY RATIONALIZABLE CHOICE

x

Sy

Z FIGURE3

B APPENDIX The task of verifying the 3-rationalizability of a given choice function is much more manageable,even "by hand,"thatone could fear.We illustratethis with an example. Take the choice function of Example 1 from Appendix A. Step 1: To constructthe family of choice correspondenceson binary sets such that y (ab) E y*(ab) for all a, b E X, observethatthis requirementrestricts '* as follows:for any {a, b}, either y*(ab) = {y (ab)), or y*(ab) = {a,b}. Thus, admissiblechoice correspondencesare given by the resultingcombinations.In our example, this would generate26 = 64 choice correspondences on the binary sets to startwith. Step 2: The number of choice correspondences allowed in Step 1 can be greatlyreduced by observing that if a E y (S) for some S which includesa pair{a, b }, it mustbe thata E y*(a, b), for otherwise if a is excludedfrom 7*, the latter could never be extendedas requiredin this step. In our example, then, this requiresx E y*(wx) (otherwisex = 7 (X) 6~y*(X)), and z E y*(xz) (otherwise z = y (wxz) 4 7*(wxz)), so that it must be y (wx) = {w,x} and y*(xz) = {x,z}, reducing the numberof eligible starting choice

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correspondencesto 24 = 16, depending on the behaviorof 7* in the remainingbinary sets.22 As for the extension to nonbinarysets, recall that, according to our algorithm, the extension satisfies a E y* (S), if and only if a E y" (ab) for all aE S, and y (S) E y' (S). Consequently, it is very easy to extendthe domainto nonbinary sets: simply dropfrom each of these largersets S any alternativethat is rejectedby y' in a binary set whose other alternativeis in S. It obviously makes sense to start checking whether WWE is satisfied on the choice correspondencethat generates the least number of additional sets. We startfrom the most "parsimonius"y*. Then, take y* (ab) = {y (ab)} for all remainingbinary sets, i.e., y*(wy)= {y}, y*(wz)= {z}, y*(xy)= {x} and y*(yz) = {y}, so that the most alternatives are dropped in the extension. For this 7, we derive the following extension: y*(wxy) = {x}, y*(wxz)= {x,z}, y*(wyz) = {y}, y*(xyz) = {x}, and

y*(X) = {x}.

Step 3: WWE holds trivially. We can move to Step 4. Step 4: With the current choice correspondence, the algorithm sends us back to Step 2, as y (y*(wxz)) = x # z = y (wxz). This failure, however,alerts us to the fact that we cannot leave z "alone"with x, suggesting that it might make sense to have y*(wz) = {w,z}. With this single modification to our correspondence in Step 2, the extension changes to y*(wxy)= {x}, y*(wxz)= {w,x,z},

The decision maker chooses the median according to B, breaking ties by picking the highest element in the set of median elements. We have z = y (xz) = y (yz) and yet y = y (xyz), violating Always Chosen. The same choice pattern is consistent with the never choose the uniquelylargest procedure (e.g., a hungry polite guest refrains from picking the largestpiece of cake from the tray).Formally,there is again a fundamental order B on alternatives (e.g., size) and the chosen alternativemust not be the unique maximizer of B. However,to interpretthe choice patternz = y (xz) = y (yz) and y = y (xyz) in this way, the fundamentalorderingmust be exactly the reverse of the one used for the "choose the median"procedure,namely,(x,y), (y,z) E B. Nick Baigent and Wulf Gaertner(1996) and Gaertnerand YongshengXu (1999a, b) have axiomatized this type of procedure.

y*(wyz)= {y}, y*(xyz)= {x}, and y*(X) = {x}.

22 Indeed, this is generally true for all choice functions that are sequentiallyrationalizable.Since any such function satisfies Always Chosen, then: either no choice from a nonbinary set is "beaten"pairwise by some other alternative in that set, in which case the choice function is rationalizable in the standardway; or the converse is true, in which case the numberof choice correspondenceson binary sets is reduced by a factor of at least two, and possibly more.

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In Step 3, again WWE holds trivially. This time, though, in Step 4 it is easy to check that y (y* (S)) = y (S) for all S E P7(X). We conclude that the choice function is 3-rationalizable. Note thatthe algorithmalso providesan indication of how the rationalescan be constructed:the single valuedness of the choice correspondence on the three binary sets {w,y}, {x,y}, and {y,z} suggests that (y,w), (x,y), (y,z) E P1. Using the constructionfrom the proof of Theorem1 on the subdomain1 (y*) = {wx,wz,xz,wxz}, we have, (w,x), (Z,w) E P2 while (w,x), (z,w), (x,z) E P3. REFERENCES Apesteguia,Jose, and MiguelA. Ballester.2005. "MinimalBooks of Rationales."ftp://ftp.econ. unavarra.es/pub/DocumentosTrab/DT0501. PDF. Baigent,Nick, and Wulf Gaertner.1996. "Never Choose the Uniquely Largest:A Characterization."Economic Theory,8(2):239-49. Ehlers, Lars, and Yves Sprumont.2006. "Weakened WARP and Top-Cycle Choice Rules." http://www.cireq.umontreal.ca/online/ lh_ys_060119.pdf. Eliaz, Kfir, and Efe A. Ok. 2006. "Indifference or Indecisiveness?Choice-TheoreticFoundations of IncompletePreferences."Games and EconomicBehavior,56(1):61-86. Gaertner, Wulf, and Yongsheng Xu. 1999a. "On Rationalizability of Choice Functions: A Characterizationof the Median." Social Choice and Welfare,16(4):629-38. Gaertner, Wulf, and Yongsheng Xu. 1999b. "On the Structure of Choice under Different External References."Economic Theory, 14(3):609-20. Gigerenzer,Gerd, Peter M. Todd, and the ABC ResearchGroup.1999.SimpleHeuristicsThat Make Us Smart.New York:OxfordUniversity Press. Gigerenzer,Gerd,and PeterM. Todd.1999."Fast andFrugalHeuristics:The AdaptiveToolbox." In SimpleHeuristics ThatMake Us Smart,ed. GerdGigerenzer,PeterM. Todd,and the ABC Research Group, 3-34. New York: Oxford UniversityPress. Kalai, Gil, Ariel Rubinstein,and Ran Spiegler. 2002. "Rationalizing Choice Functions by Multiple Rationales." Econometrica, 70(6): 2481-88.

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and Kohli,Rajeev.Forthcoming."Representation Inferenceof LexicographicPreferenceModels and TheirVariants."MarketingScience. Lombardi, Michele. Forthcoming. "Uncovered Set Choice Rules." Social Choice and Welfare. Loomes, Graham, Chris Starmer, and Robert Sugden.1991. "ObservingViolationsof Transitivity by Experimental Methods." Econometrica,59(2):425-39. Manzini, Paola, and Marco Mariotti.2006a. "A VagueTheoryof ChoiceoverTime."Advances in TheoreticalEconomics,6(1): 1-29. "TwoManzini,Paola,andMarcoMariotti.2006b. stage BoundedlyRationalChoice Procedures: Theory and ExperimentalEvidence."Queen MaryWorkingPaper561/2006. Masatlioglu, Yusufcan, and Efe A. Ok. 2005. "RationalChoicewith StatusQuo Bias."Journal of EconomicTheory,121(1):1-29. 1985. "Choice Functionsover a Moulin, Hervr. Finite Set: A Summary."Social Choice and Welfare,2: 147-60. Ok, Efe A. 2004. "Independenceof Irrelevant Alternativesand IndividualChoice."Unpublished. Ok, Efe A., and Yusufcan Masatlioglu.Forthcoming. "ATheoryof (Relative)Discounting." Journalof Economic Theory. Roelofsma, Peter H. M. P., and Daniel Read. 2000. "Intransitive Intertemporal Choice." Journalof BehavioralDecision Making,13(2): 161-77. Rubinstein,Ariel. 2003. "Is It 'Economics and Psychology'? The Case of Hyperbolic Discounting." International Economic Review, 44(4): 1207-16. Rubinstein,Ariel, and YuvalSalant. 2006. "Two Comments on Revealed Preference."http:// arielrubinstein.tau.ac.il/ papers/frames.pdf. Salant, Yuval. 2003. "Limited Computational ResourcesFavorRationality."http://ratio.huji. ac.il/dp/Salant320.pdf. Samuelson,Paul A. 1938. "A Note on the Pure Theory of Consumer'sBehavior."Economica, 5(1):61-71. Sen, Amartya. 1970. "Choice Functions and Revealed Preferences."Review of Economic Studies, 38(115):307-17. Suzumura,Kotaro. 1983. Rational Choice, Collective Decisions, and Social Welfare.Cambridge:CambridgeUniversityPress.

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MANZINIAND MARIOTTI:SEQUENTIALLY RATIONALIZABLE CHOICE

Tadenuma,Koichi. 2002. "Efficiency First or EquityFirst?TwoPrinciplesandRationalityof Social Choice."Journalof Economic Theory, 104(2):462-72. Tversky,Amos. 1969. "Intransitivityof Preferences."PsychologicalReview,76: 31-48. Tversky,Amos. 1972. "Eliminationby Aspects: A Theory of Choice."Psychological Review, 79: 281-99. Varian, Hal R. 2005. "Revealed Preference."

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http://www.sims.berkeley.edu/-hal/Papers/ 2005/revpref.pdf. Waite,ThomasA. 2001. "IntransitivePreferences in HoardingGray Jays (Perisoreuscanadensis)." Behavioral Ecology and Sociobiology, 50(2): 116-21. Yee, Michael, Ely Dahan, John R. Hauser, and JamesB. Orlin.Forthcoming."Greedoidbased Non-compensatoryTwo-stage Considerationthen-choiceInference."MarketingScience.

Sequentially Rationalizable Choice

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