Most information structures have multiple unobserved causes.
Learning about a specific cause requires taking into account other causes in the signal structure.
For example, a principal who infers an agent’s effort from his performance needs to factor in other inputs such as luck.
A failure to consider alternatives generates misattribution to the cause of interest.
Using a series of laboratory and online experiments, this paper demonstrates that people are inattentive to alternative causes, leading to excessively sensitive and overprecise beliefs.
This neglect is driven by people’s unawareness about the need to take into account other sources of randomness in a signal structure.
Higher effort is typically insufficient to overcome this unawareness, but contextual cues that shift attention to the neglected part of the problem reduce the bias.
The evidence from more than twenty treatments is consistent with a model in which automatic, simplified representations of an updating problem form the basis for how new information is processed.
Sources and Heterogeneity of Reference Dependence - An Empirical Examination with Lorenz Goette, Alex Kellogg and Charles Sprenger
This project examines the role of heterogeneity in loss aversion for identifying models of expectations-based reference dependence (Kőszegi and Rabin, 2006, 2007) (KR). Different levels of loss aversion lead to different signs for comparative statics previously used to test the KR model. In an experiment with 607 subjects, we show heterogeneous treatment effects over loss aversion types. Recognizing heterogeneity in loss aversion allows us to reliably recover the KR model’s central element of expectations-based reference points. Additional effects are discussed related to the subjective perception of exchange experiences.
Breaking Trust: On the Persistent Effect of Economic Crisis Experience with Tom Zimmermann
Recent empirical evidence documents substantial geographical and temporal heterogeneity in trust levels that has far-reaching implications for societies’ economic outcomes. However, little is known about the sources of this variation. This paper examines the breach of trust hypothesis on the impact of adverse experience in economic interactions. Using a variety of identification strategies in a large cross-country sample, we estimate a persistent and robust negative long-term effect of economic crisis experience on trust in other people. In line with the hypothesis, the effect is specific to living through crises in trust-intensive domains, most of all banking crises. The effect is not driven by distrust in financial institutions but is accommodated by a lack of confidence in the political class, and operates via beliefs rather than changes in preferences. Our baseline cross-country evidence is corroborated by a separate within-country replication of the findings that exploits regional variation in the experience of U.S. bank failures.
Intertemporal Altruism with Armin Falk and Philipp Eisenhauer