IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v75y2023i3d10.1007_s00199-022-01423-7.html
   My bibliography  Save this article

Forgetful updating and stubborn decision-makers

Author

Listed:
  • Tai-Wei Hu

    (University of Bristol)

Abstract

A decision-maker receives an informative signal each period and is randomly required to make a terminal action based on the signals received so far. The decision-maker is restricted to use a (stochastic) finite automaton no larger than a given size to process information. In contrast to the existing literature that focuses on very low probability of termination, I consider information structures with a (nearly) revealing signal, in which analytical solutions are available for all probability values of termination. Results from that model reveal two robust predictions regarding constrained optimal behaviour. First, it is optimal to ignore small (in terms of informativeness) signals. Second, when deterministic schemes are optimal, big signals with similar strengths should be treated similarly; otherwise, randomization takes a lexicographic order according to the strengths of the signals. I also identify a new behavioural bias, information stubbornness, according to which the decision maker does not respond to further informative signals after seeing a nearly revealing signal. As a result, the decision-maker can persistently choose the wrong action even after an unbounded number of informative signals.

Suggested Citation

  • Tai-Wei Hu, 2023. "Forgetful updating and stubborn decision-makers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(3), pages 781-802, April.
    • Handle: RePEc:spr:joecth:v:75:y:2023:i:3:d:10.1007_s00199-022-01423-7
    DOI: 10.1007/s00199-022-01423-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00199-022-01423-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00199-022-01423-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kalai, Ehud & Solan, Eilon, 2003. "Randomization and simplification in dynamic decision-making," Journal of Economic Theory, Elsevier, vol. 111(2), pages 251-264, August.
    2. Piccione, Michele & Rubinstein, Ariel, 1997. "On the Interpretation of Decision Problems with Imperfect Recall," Games and Economic Behavior, Elsevier, vol. 20(1), pages 3-24, July.
    3. Daniel Monte & Maher Said, 2014. "The value of (bounded) memory in a changing world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(1), pages 59-82, May.
    4. Yeon-Koo Che & Konrad Mierendorff, 2019. "Optimal Dynamic Allocation of Attention," American Economic Review, American Economic Association, vol. 109(8), pages 2993-3029, August.
    5. Barlo, Mehmet & Carmona, Guilherme & Sabourian, Hamid, 2009. "Repeated games with one-memory," Journal of Economic Theory, Elsevier, vol. 144(1), pages 312-336, January.
    6. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June.
    7. Andrea Wilson, 2014. "Bounded Memory and Biases in Information Processing," Econometrica, Econometric Society, vol. 82, pages 2257-2294, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chatterjee, Kalyan & Hu, Tai-Wei, 2023. "Learning with limited memory: Bayesianism vs heuristics," Journal of Economic Theory, Elsevier, vol. 209(C).
    2. Chatterjee, Kalyan & Guryev, Konstantin & Hu, Tai-Wei, 2022. "Bounded memory in a changing world: Biases in behaviour and belief," Journal of Economic Theory, Elsevier, vol. 206(C).
    3. Monte, Daniel, 2013. "Bounded memory and permanent reputations," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 345-354.
    4. Faruk Gul & Wolfgang Pesendorfer & Tomasz Strzalecki, 2017. "Coarse Competitive Equilibrium and Extreme Prices," American Economic Review, American Economic Association, vol. 107(1), pages 109-137, January.
    5. Raphael Thomadsen & Pradeep Bhardwaj, 2011. "Cooperation in Games with Forgetfulness," Management Science, INFORMS, vol. 57(2), pages 363-375, February.
    6. Monte, Daniel, 2014. "Learning with bounded memory in games," Games and Economic Behavior, Elsevier, vol. 87(C), pages 204-223.
    7. Andrés Perea & Elias Tsakas, 2019. "Limited focus in dynamic games," International Journal of Game Theory, Springer;Game Theory Society, vol. 48(2), pages 571-607, June.
    8. Philippe Jehiel & Jakub Steiner, 2020. "Selective Sampling with Information-Storage Constraints [On interim rationality, belief formation and learning in decision problems with bounded memory]," The Economic Journal, Royal Economic Society, vol. 130(630), pages 1753-1781.
    9. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    10. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2020. "Memory, Attention, and Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1399-1442.
    11. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    12. Leung, Benson Tsz Kin, 2020. "Limited cognitive ability and selective information processing," Games and Economic Behavior, Elsevier, vol. 120(C), pages 345-369.
    13. Battigalli, Pierpaolo & Generoso, Nicolò, 2024. "Information flows and memory in games," Games and Economic Behavior, Elsevier, vol. 145(C), pages 356-376.
    14. Saucet, Charlotte & Villeval, Marie Claire, 2019. "Motivated memory in dictator games," Games and Economic Behavior, Elsevier, vol. 117(C), pages 250-275.
    15. Luca Anderlini & Dino Gerardi & Roger Lagunoff, 2004. "The Folk Theorem in Dynastic Repeated Games," Cowles Foundation Discussion Papers 1490, Cowles Foundation for Research in Economics, Yale University.
    16. Yuval Salant & Jörg L. Spenkuch, 2021. "Complexity and Choice," CESifo Working Paper Series 9239, CESifo.
    17. Daniel Monte, 2014. "Incentive constraints in games with bounded memory," International Journal of Game Theory, Springer;Game Theory Society, vol. 43(1), pages 137-143, February.
    18. Halpern, Joseph Y., 2003. "A computer scientist looks at game theory," Games and Economic Behavior, Elsevier, vol. 45(1), pages 114-131, October.
    19. Ruebeck, Christopher S., 1999. "Imitation dynamics in the repeated Prisoners' Dilemma: an exploratory example," Journal of Economic Behavior & Organization, Elsevier, vol. 40(1), pages 81-104, September.
    20. Charlotte Saucet & Marie Claire Villeval, 2019. "Motivated memory in dictator games," Post-Print halshs-02193604, HAL.

    More about this item

    Keywords

    Imperfect recall; Bounded rationality; Bounded memory; Absent-minded; Behavioural biases;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:75:y:2023:i:3:d:10.1007_s00199-022-01423-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.