This dissertation includes three essays on decision-making by boundedly rational economic agents. The first essay deals with decision-making by firms where decision-making is costly. The other two essays deal with decision-making by individuals. Taken together, the last two argue that decision-making is stochastic, and develop a stochastic model of decision-making reflecting that argument. In particular, the second essay does a detailed review of the psychological literature on estimating probabilities, and argues that the most successful explanation of the psychological results is that people's estimates are stochastic. Decision-making is costly, and so people use various heuristics to economize on the use of mental resources. The results suggest that the choice of heuristic may be partially random. The third essay builds on the second and develops an axiomatic model of choice, in the spirit of Savage (1954), in which individual's beliefs about the probabilities of events are modeled by a stochastic process.
