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Published July 7, 2022 | Submitted
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On the meaning of the Critical Cost Efficiency Index

Abstract

This note provides a critical discussion of the Critical Cost-Efficiency Index} (CCEI) as used to assess deviations from utility-maximizing behavior. I argue that the CCEI is hard to interpret, and that it can disagree with other plausible measures of "irrational" behavior. The common interpretation of CCEI as wasted income is questionable. Moreover, I show that one agent may have more unstable preferences than another, but seem more rational according to the CCEI. This calls into question the (now common) use of CCEI as an ordinal and cardinal measure of degrees of rationality.

Additional Information

I thank Roy Allen, Laurens Cherchye, Bram De Rock, Thomas Demuynck, Paweł Dziewulski, Yoram Halevy, Taisuke Imai, Shachar Kariv, SangMok Lee, Matt Polisson, Matt Shum, and John Quah for discussing this note with me. This does not mean that they agree with the views I express here. I am also grateful to the National Science Foundation for financial support through grant SES-1558757.

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Additional details

Created:
August 20, 2023
Modified:
October 24, 2023