IDENTIFYING RULE-BASED RATIONALITY

—The revealed preference methodology allows an observer to infer preferences from choices. This paper extends this fundamental idea by experimentally identifying the preference for basing choices on simple decision rules. Subjects not only make case-by-case portfolio allocations but also design a simple investment rule for selecting portfolios. They then choose between these two decision modes for an additional set of problems. The majority opt for the rule interface and in most cases choose a simple investment rule that cannot be rationalized by any simple utility function or accounted for by reductions in decision time or by cognitive costs.