A Sparsity-Based Model of Bounded Rationality *

Abstract This article defines and analyzes a “sparse max” operator, which is a less than fully attentive and rational version of the traditional max operator. The agent builds (as economists do) a simplified model of the world which is sparse, considering only the variables of first-order importance. His stylized model and his resulting choices both derive from constrained optimization. Still, the sparse max remains tractable to compute. Moreover, the induced outcomes reflect basic psychological forces governing limited attention. The sparse max yields a behavioral version of basic chapters of the microeconomics textbook: consumer demand and competitive equilibrium. I obtain a behavioral version of Marshallian…