Economic Decision Making with Limited Attention

Because attention is a scarce resource, people may not gather all relevant information before making an economic choice: Shoppers may buy unnecessarily expensive products due to their failure to notice whether or not sales tax is included in stated price; purchasers may limit their attention to a relatively small number of websites when buying over the internet; firms may adjust their prices only infrequently in response to changing economic circumstances. Yet apparently mistaken choices may be the result of a rational trade off between the costs and benefits of information acquisition. As information becomes evermore plentiful, it becomes increasingly important to understand how people choose to what to attend.

Much of the work of the lab focuses on developing and testing models of choice with limited attention, and understanding the implications of limited attention for economic behavior.

Bounded Rationality in Macroeconomics

Modern macroeconomic analysis typically relies heavily upon assumptions that economic agents are fully informed about their environment, and that they act on expectations that are rational given the available information. Yet empirical evidence challenges both of these benchmark assumptions and points towards significant deviations from them. Households and managers of firms often appear to be highly uninformed about the macroeconomic environment in which they operate. They make biased and persistent errors in tracking and forecasting variables such as inflation, output growth and unemployment, and their expectations are not fully consistent with those of fully rational agents.  

The lab’s work in this area focuses on identifying the nature and the severity of these deviations from the full-information rational-expectations hypothesis, using both laboratory experiments and surveys of expectations in the field; and on investigating  the macroeconomic implications of such deviations, by developing new micro-founded macroeconomic models that incorporate assumptions about individual behavior that are more consistent with empirical evidence.

Links Between Behavioral Economic Phenomena

Over the past 30 years, behavioral and experimental economists have made great strides in identifying robust phenomena that are hard to explain within the classic model of economic choice, including high short-term discount rates and small stakes risk aversion, present bias, loss aversion, the endowment effect, aversion to ambiguity, and the Allais paradox. One of the research interests of the lab is to identify the theoretical and empirical links between these behaviors. Our primary aim is to test and develop parsimonious models of economic choice that can capture many features of behavior with a small number of parameters. The construction of such models is of first-order importance for the systematic application of behavioral economic insights to mainstream economic analysis.

Incomplete Preferences

The typical assumption in economics is that choices follow a preference relation that is complete, stable over time, and that satisfies various normative properties (e.g. Expected Utility). However, this assumption has been criticized both empirically and conceptually. Empirically, by documenting a large number of “biases” incompatible with these postulates (e.g. the Willingness to Pay/Accept gap, or Stochastic Choice). Conceptually, a large literature in economics and psychology has criticized the assumption that preferences are complete, arguing that instead often subjects may not know what they prefer and may need to use a heuristic to make a choice in this case. The projects in this area study incomplete preferences formally and introduce models of behavior in which subjects may need to “resolve” this incompleteness in some way, leading to some of the well-known biases documented empirically. We also introduce projects to experimentally test the presence of incomplete preferences and the implications of these models.

Neuroeconomics

The field of neuroeconomics aims to understand the neurological basis of economic choice. An understanding of the processes and constrains that underlie choice behavior may help in the design of future models. Our work in this area has focused on the mechanics of learning and belief formation, and specifically the role of the neurotransmitter dopamine, which has been of interest to neuroeconomists due to its apparent role in transmitting information about beliefs and preferences. It has been hypothesized that dopamine encodes `reward prediction error', or the the difference between the expected and realized rewards associated with an event. Much of our work has involved using theoretical techniques from economics to design experimental tests of the reward prediction hypothesis.

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© 2017 by Cognition and Decision Lab at Columbia University.