We study the impact of manipulating the attention of a decision-maker who learns sequentially about a number of items before making a choice. Under natural assumptions on the decision-maker's strategy, forcing attention toward one item increases the likelihood of its being chosen.
Psychologists emphasize two aspects of habit formation: (i) habits arise when the history of a decision process correlates with optimal continuation actions, and (ii) habits alleviate cognition costs. We ask whether serial correlation of optimal actions alone mechanically induces habits, or, instead, habits are optimal adaptations. We compare lab treatments that differ in the information provided to subjects, holding fixed the serial correlation of optimal actions. We find that past actions affect continuation behavior only in the treatment in which this habit is useful. Our result suggests that caution is warranted when modeling habits via a fixed utility over action sequences.
Selective Sampling with Information-Storage Constraints, with Philippe Jehiel, this draft 20 Aug 2018, presentation
A decision-maker acquires payoff-relevant information until she reaches her storing capacity, at which point she either terminates the decision-making and chooses an action, or discards some information. By conditioning the probability of termination on the information collected, she controls the correlation between the payoff state and her terminal action. We provide an optimality condition for the emerging stochastic choice. The condition highlights the benefits of selective memory applied to the extracted signals. The constrained-optimal choice rule exhibits (i) confirmation bias, (ii) speed-accuracy complementarity, (iii) overweighting of rare events, and (iv) salience effect.
1. On the Cost of Misperception: General Results and Behavioral Applications, with Olivier Gossner, Journal of Economic Theory 177, September 2018, 816-847, presentation
In a choice model, we characterize the loss induced by misperceptions of payoff-relevant parameters across a distribution of decision problems. When the agent cannot avoid misperceptions but has some control over the distribution of errors, we show that strategies that minimize loss from misperception exhibit systematic biases, akin to some documented in the behavioural and psychological literatures. We include illusion of control, anchoring, overprecision, and overweighting of small probabilities as illustrative examples.
We solve a general class of dynamic rational-inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased towards an optimal default rule that depends only on the history of actions, not on the realized state. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision-making.
When an agent chooses between prospects, noise in information processing generates an effect akin to the winner's curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception pattern exhibits a key feature of prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events). This bias arises to correct for the winner's curse effect.
4. Price Price Distortions under Coarse Reasoning with Frequent Trade, with Colin Stewart, 2015, J. Econ. Theory 159, 574-595. Presentation, Supplement
7. Reversibility in Dynamic
Coordination Problems, with Eugen Kováč, 2013,
Games and Economic Behavior 77, 298–320.
8. Who Matters in Coordination Problems?, with József Sákovics, 2012, American Economic Review 102(7), 3439–3461.
Coordination with Private Learning, with Amil Dasgupta and Colin Stewart, 2012, Games
and Economic Behavior 74, 83–101.
10. Communication, Timing, and Common Learning, with Colin Stewart, 2011, J. Econ. Theory 146, 230–247. (the paper explained on the blog of Jeff Ely).
11. Contagion through Learning, with Colin Stewart, 2008, Theoretical Economics 3, 431–458.
12. Coordination of Mobile Labor, 2008, J. Econ. Theory 139(1), 25–46.
13. Coordination Cycles, 2008, Games and Economic Behavior 63(1), 308–327.
14. The Effects of Risk Aversion in Mixed-Strategy Equilibria of 2x2 Games, with Dirk Engelmann, 2007, Games and Economic Behavior 60, 381–388.
15. A Trace of Anger is Enough: On the Enforcement of Social Norms, 2007, Economics Bulletin, vol. 8. expanded version
16. Dynamic scaling and universality in evolution of fluctuating random networks, with Kotrla M. and F. Slanina, 2002, Europhys. Lett. 60, 14–20.