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On the cost of misperception: general results and behavioral applications


Gossner, Olivier; Steiner, Jakub (2018). On the cost of misperception: general results and behavioral applications. Journal of Economic Theory, 177:816-847.

Abstract

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 behavioral and psychological literatures. We include illusion of control, order effect, overprecision, and overweighting of small probabilities as illustrative examples.

Abstract

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 behavioral and psychological literatures. We include illusion of control, order effect, overprecision, and overweighting of small probabilities as illustrative examples.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Memory, bounded rationality, perception bias, overconfidence
Language:English
Date:September 2018
Deposited On:12 Oct 2018 09:20
Last Modified:12 Oct 2018 15:05
Publisher:Elsevier
ISSN:0022-0531
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jet.2018.08.003
Project Information:
  • : FunderH2020
  • : Grant ID770652
  • : Project TitleBEHAVFRICTIONS - Behavioral Implications of Information-Processing Frictions

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Embargo till: 2020-09