On the meaning of the Critical Cost Efficiency Index

TL;DR

This paper critically examines the Critical Cost-Efficiency Index (CCEI), highlighting its interpretative difficulties, potential inconsistencies with other measures, and questioning its validity as a measure of rationality in economic behavior.

Contribution

It provides a detailed critique of the CCEI, arguing that it is problematic as both an interpretative and a comparative measure of rationality.

Findings

CCEI can be difficult to interpret accurately.

It may conflict with other measures of irrationality.

The use of CCEI as a rationality measure is questionable.

Abstract

This note provides a critical discussion of the \textit{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.