(Neuro)Cognitive Constraints in Decision-Making: From Consumer Behavior to Strategic Choice

ABSTRACT

The human mind has finite computational cognitive capacity. First, I will briefly discuss how specific neurobiologically defined cognitive limitations can yield improved behavioral models of inconsistencies and context-effects in individual decision-making and in consumer choice. Then, I will devote the bulk of the talk to a similar analysis of strategic choice. Classical game theory assumes that players reason their way to Nash Equilibrium. This assumption has been challenged by behavioral data and models showing that humans tend to employ other strategies. Here, I seek to explain deviation from classical theory by introducing a new neurobiologically-inspired measure of game-complexity, which decomposes each interaction into social and non-social arithmetic cognitive demands. Utilizing the economic concept of production functions, I develop a psychophysical approach that models strategic sophistication as the product of a subject’s capabilities on each of these dimensions. In three studies, I show that social and arithmetic demands are contextual factors for sophistication that behave lawfully with psychophysical regularity, that subjects trade-off these capabilities as game-complexity varies, and that performance is a saturating function of processing time and monetary incentives. My results are a hybrid, applying concepts from neuroscience and psychology to strategic choice using the powerful, flexible and predictive formalism of the production function. My findings lay the ground for a detailed neurocognitively-inspired model for strategic choice and suggest several applications for the managerial studies.