Better the Devil You Know than the Devil you Don’t An Inductive Theory of Choice

We propose and develop a theory of choice free of concepts such as utility function or preference relation. We replace the primitives used in traditional rational choice theories by similarity function— used to compare any alternative to a reference alternative— and a minimum distance choice function. It is shown that this model can explain the appearance of intransitive choices, which are central to any descriptive theory of choice. Since decision-makers have computational constraints, this is all they need to make choices. Two possible biases may affect the outcome of the choice situation, but we argue that rationality is the natural mechanism of defense against these biases. Rationality is then a long-run concept, where experience and learning allows to correct such biases. Different applications are presented, ranging from market behavior, decision under uncertainty, scientific objectivity, marketing and advertisement strategies, among others. Aggregation results are obtained with the use of institutions which are defined and developed, in a clearly microeconomic fashion.