Chaotic Decision Bifurcation under Bounded Rationality using Real Options Model

Abstract

This research focuses on a case where an agent makes an investment decision under rational inattention with bounded rationality. When facing multiple investment options under uncertainty, the additional information can be acquired at some cost. Real options model is applied to analyze the investment options among the multiple choices and the information cost is valued based on the Shannon's entropy. The derived multinomial logit is linked to Gibbs--Boltzmann distribution in order to prove the existence of bifurcations that give rise to a cascade of chaos. The result provides a realistic insight on the possible chaos in decision-making when facing multiple choices under limited information.