IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/89837.html
   My bibliography  Save this paper

On the cost of misperception: general results and behavioural applications

Author

Listed:
  • Gossner, Olivier
  • Steiner, Jakub

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

Suggested Citation

  • Gossner, Olivier & Steiner, Jakub, 2018. "On the cost of misperception: general results and behavioural applications," LSE Research Online Documents on Economics 89837, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:89837
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/89837/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    2. Larbi Alaoui & Antonio Penta, 2018. "Cost-benefit analysis in reasoning," Economics Working Papers 1621, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    4. David Hirshleifer & Ivo Welch, 2002. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 379-421, September.
    5. Nick Netzer, 2009. "Evolution of Time Preferences and Attitudes toward Risk," American Economic Review, American Economic Association, vol. 99(3), pages 937-955, June.
    6. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    7. Olivier Gossner & Jakub Steiner, 2016. "Optimal Illusion of Control and Related Perception Biases," Edinburgh School of Economics Discussion Paper Series 276, Edinburgh School of Economics, University of Edinburgh.
    8. Jakub Steiner & Colin Stewart, 2016. "Perceiving Prospects Properly," American Economic Review, American Economic Association, vol. 106(7), pages 1601-1631, July.
    9. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    10. Barton L. Lipman, 1995. "Information Processing and Bounded Rationality: A Survey," Canadian Journal of Economics, Canadian Economics Association, vol. 28(1), pages 42-67, February.
    11. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    12. Page, Lionel & Page, Katie, 2010. "Last shall be first: A field study of biases in sequential performance evaluation on the Idol series," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 186-198, February.
    13. Arthur J. Robson, 2001. "Why Would Nature Give Individuals Utility Functions?," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 900-929, August.
    14. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    15. Michael Woodford, 2012. "Prospect Theory as Efficient Perceptual Distortion," American Economic Review, American Economic Association, vol. 102(3), pages 41-46, May.
    16. Luis Rayo & Gary S. Becker, 2007. "Evolutionary Efficiency and Happiness," Journal of Political Economy, University of Chicago Press, vol. 115(2), pages 302-337.
    17. Alessandro Pavan, 2014. "Attention, Coordination, and Bounded Recall," Discussion Papers 1576, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    18. Michel De Lara & Olivier Gossner, 2017. "An instrumental approach to the value of information," Working Papers 2017-49, Center for Research in Economics and Statistics.
    19. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 55-79.
    20. James Dow, 1991. "Search Decisions with Limited Memory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 1-14.
    21. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    22. Andrea Wilson, 2014. "Bounded Memory and Biases in Information Processing," Econometrica, Econometric Society, vol. 82, pages 2257-2294, November.
    23. Sendhil Mullainathan, 2002. "A Memory-Based Model of Bounded Rationality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 735-774.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mira Frick & Ryota Iijima & Yuhta Ishii, 2021. "Welfare Comparisons for Biased Learning," Cowles Foundation Discussion Papers 2274R, Cowles Foundation for Research in Economics, Yale University, revised Mar 2021.
    2. Khan, Abhimanyu, 2022. "Expected utility versus cumulative prospect theory in an evolutionary model of bargaining," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).

    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. Olivier Gossner & Jakub Steiner, 2016. "Optimal Illusion of Control and Related Perception Biases," Edinburgh School of Economics Discussion Paper Series 276, Edinburgh School of Economics, University of Edinburgh.
    2. 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.
    3. Adriani, Fabrizio & Sonderegger, Silvia, 2020. "Optimal similarity judgments in intertemporal choice (and beyond)," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Jakub Steiner & Colin Stewart, 2016. "Perceiving Prospects Properly," American Economic Review, American Economic Association, vol. 106(7), pages 1601-1631, July.
    5. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    6. Steiner, Jakub & Jehiel, Philippe, 2017. "On Second Thoughts, Selective Memory, and Resulting Behavioral Biases," CEPR Discussion Papers 12546, C.E.P.R. Discussion Papers.
    7. Scott Duke Kominers & Xiaosheng Mu & Alexander Peysakhovich, 2019. "Paying for Attention: The Impact of Information Processing Costs on Bayesian Inference," Working Papers 2019-31, Princeton University. Economics Department..
    8. Ryan Webb & Paul W. Glimcher & Kenway Louie, 2021. "The Normalization of Consumer Valuations: Context-Dependent Preferences from Neurobiological Constraints," Management Science, INFORMS, vol. 67(1), pages 93-125, January.
    9. Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
    10. Brice Corgnet & Roberto Hernán González, 2023. "On The Appeal Of Complexity," Working Papers 2312, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    11. Steiner, Jakub & Netzer, Nick & Robson, Arthur & Kocourek, Pavel, 2021. "Endogenous Risk Attitudes," CEPR Discussion Papers 16190, C.E.P.R. Discussion Papers.
    12. Moshe Levy, 2022. "An evolutionary explanation of the Allais paradox," Journal of Evolutionary Economics, Springer, vol. 32(5), pages 1545-1574, November.
    13. Herold, Florian & Netzer, Nick, 2023. "Second-best probability weighting," Games and Economic Behavior, Elsevier, vol. 138(C), pages 112-125.
    14. Steiner, Jakub & Stewart, Colin, 2014. "Perceiving Prospects Properly," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-39, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    15. Gottlieb, Daniel, 2014. "Imperfect memory and choice under risk," Games and Economic Behavior, Elsevier, vol. 85(C), pages 127-158.
    16. José F. Tudón M., 2019. "Perception, utility, and evolution," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 191-208, December.
    17. Leung, Benson Tsz Kin, 2020. "Limited cognitive ability and selective information processing," Games and Economic Behavior, Elsevier, vol. 120(C), pages 345-369.
    18. Olivier Gossner & Christoph Kuzmics, 2019. "Preferences Under Ignorance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 241-257, February.
    19. Crawford, VP, 2014. "Boundedly rational versus optimization-based models of strategic thinking and learning in games," University of California at San Diego, Economics Working Paper Series qt04h694rz, Department of Economics, UC San Diego.
    20. Saucet, Charlotte & Villeval, Marie Claire, 2019. "Motivated memory in dictator games," Games and Economic Behavior, Elsevier, vol. 117(C), pages 250-275.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ehl:lserod:89837. 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: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    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.