This paper introduces a formal definition and an experimental measurement of the concept of cognitive uncertainty: people’s subjective uncertainty about what the optimal action is.
This concept allows us to bring together and partially explain a set of behavioral anomalies identified across
four distinct domains of decision-making: choice under risk, choice under ambiguity, belief updating, and survey
expectations about economic variables. In each of these domains, behavior in experiments and surveys tends to be
insensitive to variation in probabilities, as in the classical probability weighting function. Building on existing models of noisy
Bayesian cognition, we formally propose that cognitive uncertainty generates these patterns by inducing people to compress probabilities
towards a mental default of 50:50. We document experimentally that the responses of individuals with higher cognitive uncertainty
indeed exhibit stronger compression of probabilities in choice under risk and ambiguity, belief updating, and survey expectations.
Our framework makes predictions that we test using exogenous manipulations of both cognitive uncertainty and the location of the mental default.
The results provide causal evidence for the role of cognitive uncertainty in belief formation and choice, which we quantify through structural estimations.
This paper studies why belief formation errors arise in a novel updating task that captures a key feature of information structures in practice: people need to learn about a state of the world from information that also depends on other unobserved states.
For example, consider someone trying to infer effort (X) from observed performance (S = X + Y), which is also influenced by luck (Y).
The first part of the paper uses a series of laboratory and online experiments to causally demonstrate a pervasive neglect
of alternative causes in information structures,
leading to excessively sensitive and overprecise beliefs.
The second part explores the mechanisms behind this neglect.
Evidence from more than twenty treatments consistently shows
that inattention to alternative causes is not driven by
excessive complexity, computational errors or deliberate effort
reduction. Instead, people spontaneously form
incomplete mental models of the problem that determine
how information is processed. They are confident in
their misspecified models and unaware of the resulting error.
These mental representations are not stable but context-dependent:
cues that direct attention to the neglected part of the
problem alleviate the bias.
Selected work in progress
Heterogeneity of Gain-Loss Attitudes and Expectations-Based Reference Points with Lorenz Goette, Alex Kellogg and Charles Sprenger (submitted)
This project examines the role of heterogeneity in gain-loss attitudes for identifying models of expectations-based reference dependence (Kőszegi and Rabin, 2006, 2007) (KR). Different gain-loss attitudes lead to different signs for KR comparative statics. Failure to account for the known heterogeneity in gain-loss attitudes is a central confounding factor challenging prior tests of the KR model conducted under the assumption of universal loss aversion. We document heterogeneous treatment effects over gain-loss types in both an initial experiment and an exact replication. Recognizing heterogeneity over types allows us to both recover the KR model’s central predictions, and account for inconsistency across prior empirical tests.
Delayed Negative Effects of Prosocial Spending on Happiness with Armin Falk (Revision requested at Proceedings of the National Academy of Sciences) [abstract]
Does prosocial behavior promote happiness?
We test this longstanding
hypothesis in a behavioral experiment that extends the scope of previous studies. In our Saving a Life paradigm, every participant either saved one human life by triggering a targeted donation of 350 euros, or received an amount of 100 euros. Using a choice paradigm between two binary lotteries with different chances of saving a life, we observed subjects’ intentions at the same time as creating random variation in prosocial outcomes. We repeatedly measured happiness at various delays. Our data replicates the positive effect identified in previous research, but only for the very short run. One month later, the sign of the effect reversed, and prosocial behavior led to significantly lower happiness than obtaining the money. Our findings revealed a more nuanced causal relationship than previously suggested, providing an explanation for the apparent absence of universal prosocial behavior.
Breaking Trust: On the Persistent Effect of Banking Crisis Experience with Tom Zimmermann (submitted)
A popular narrative associates negative shocks to the banking sector with “crises of trust”. Exploiting cohort-variation within and across countries, we investigate this link systematically. We find a robust and sizeable effect of banking crises experience on interpersonal trust: Our benchmark estimate implies that experiencing a banking crisis 20 years ago decreases current trust by one-third as much as a recent personal traumatic experience. We provide evidence that the effect is not driven by income losses during crises but it is consistent with a breach of trust channel, relating our findings to a well-established phenomenon in the social sciences.
Intertemporal Altruism with Felix Chopra, Armin Falk and Philipp Eisenhauer