Bounded rationality, social and cultural norms, and interdependence via reference groups

Abstract

This paper presents an axiomatic theory of preference orderings similar in abstraction to the standard preference model, but developed for the analysis of bounded rationality where social norms and reference groups serve as sources of low-cost heuristics that can absorb costly deliberation and other limits to rationality. A two-step choice process is proposed, in which physical wants are satisfied sequentially with social want reducing choice indeterminacy. Social want is captured by emulation–avoidance of reference groups, and the serviceabilities of a commodity bundle to it are imputed. The resulting norm-guided behavior is rationalizable in the traditional sense.