This paper shows theoretically and experimentally that cognitive uncertainty directionally predicts economic actions and beliefs. When people are cognitively uncertain about what the right action is, they implicitly compress objective probabilities towards a mental default of 50:50. By experimentally measuring cognitive uncertainty, this insight allows us to bring together and partially explain behavioral anomalies identified in choice under risk, choice under ambiguity, belief updating, and survey forecasts of economic variables. Through exogenous manipulations of both cognitive uncertainty and the location of the mental default, we provide causal evidence for the role of cognitive uncertainty, 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.
Heterogeneity of Gain-Loss Attitudes and Expectations-Based Reference Points with Lorenz Goette, Alex Kellogg and Charles Sprenger
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.
Does prosocial behavior promote happiness? We test this longstanding hypothesis in a behavioral experiment that extends the
scope of previous research. In our Saving a Life paradigm, every
participant either saved one human life in expectation 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 weakly replicate 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. Notably, even
those subjects who chose prosocially were ultimately happier if
they ended up getting the money for themselves. Our findings
revealed a more nuanced causal relationship than previously suggested, providing an explanation for the apparent absence of
universal prosocial behavior.