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Separating Preferences from Endogenous Effort and Cognitive Noise in Observed Decisions

Author

Listed:
  • Christian Belzil

    (CREST, CNRS, Paris Polytechnic Institute, IZA, and CIRANO)

  • Tomáš Jagelka

    (University of Bonn, Dartmouth College, CREST-Ensae, and IZA)

Abstract

We develop a framework for accounting for individuals’ effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice.

Suggested Citation

  • Christian Belzil & Tomáš Jagelka, 2024. "Separating Preferences from Endogenous Effort and Cognitive Noise in Observed Decisions," Working Papers 2024-13, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2024-13
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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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