Persuasion,binary choice,and the costs of dishonesty

We study the strategic interaction between a decision maker who needs to take a binary decision but is uncertain about relevant facts and an informed expert who can send a message to the decision maker but has a preference over the decision. We show that the probability that the expert can persuade the decision maker to take the expert’s preferred decision is a hump-shaped function of his costs of sending dishonest messages.     

Speed and quality of collective decision making: Imperfect information processing

This paper studies efficient programmed hierarchies as introduced by Radner [The organization of decentralized information processing, Econometrica 61(5) (1993) 1109-1146] in which agents cannot process information perfectly. A group of P identical managers has to make a choice between n alternatives. In order to learn which is the best option, the alternatives have to be compared. The evaluation of an alternative takes time and managers are only able to identify the better one of two alternatives with a positive probability. The skip-level reporting tree proposed by Radner is found to be efficient in terms of the dimensions decision cost, decision delay, and decision quality.     

The separability axiom and equal-sharing methods

A quasi-linear social choice problem is defined as selecting one (among finitely many) indivisible public decision and a vector of monetary transfers among agents to cover the cost of this decision. This decision is based upon individual preferences, which are assumed to be additively separable and linear in money. The Separability axiom is a consistency property for choice methods on societies with variable size: the decision is not affected if we remove an arbitrary agent under the condition that he be guaranteed his original utility level and the cost to the remaining agents is modified accordingly. Thus the utility level assigned by the social choice function to agent i is the price at which the other agents are unanimously willing to buy agent is share of the decision power. A general characterization of choice methods satisfying this axiom is provided. Three subclasses of particular interest are characterized by additional milder axioms. Those are: (i) equal sharing of the surplus left over some reference utility (e.g., the utility at a status quo decision), (ii) utilitarian methods that merely select the efficient public decision and perform no monetary transfers, and (iii) equal allocation of nonseparable costs, which divides equally the surplus left over from the utility derived from the pivotal mechanism (also known as the Vickrey-Clarke-Groves mechanism).     

Inter-temporal choices with temporal reference dependence

I develop an intertemporal choice model for rational deviators whose preferences depend not only on their actual consumption but also on comparison to their beliefs about the optimal consumption. The standard decision maker is loss averse with respect to this belief-dependent reference point. When psychologically weighted loss aversion is low, a decision maker deviates from the standard intertemporal choice behavior and over-consumption, as well as the alternative possibility of under-consumption can be rationalized. When the decision maker has time-varying degrees of loss aversion, he re-optimizes the consumption plan through adjusted beliefs as subsequent selves realize that past decision for the present period is no longer optimal. In the dynamic model, I solve for consistent intertemporal optimization rules by which a dynamic deviator should meet rational intertemporal consistency at each point in time. Finally, I demonstrate that the dynamic reference dependent model can solve a puzzling feature in lifecycle consumption data.     

不确定性、经济选择方式与资源配置效率

在充分分析行为人信息处理能力局限性的前提下,结合心理因素提出了行为人选择中的非对称序贯决策与行为中的试验性动机,非对称序贯决策最基本的功能包括两个方面,一是行为人主观概率判断的改善,另一是基于不确定程度变化的风险有效控制;试验性动机最显著的特点是,行为人以可接受的成本为代价,通过试探性过程的实践学习,达到降低不确定性程度,并以此实现追求确定性收益最大化的目的。以试验性动机为前提的非对称序贯决策,在资源配置上虽不一定是最优的,但其与竞争性市场的结合却是相对有效的;同时,正是人类的这种试验性动机,构成了经济进步的原动力。     

The rationality and efficacy of decisions under uncertainty and the value of an experiment

Summary A decision maker faces a known prior distribution over payoff relevant states. We compare the expected utility of this individual under two scenarios. In the first, the decision maker makes a choice without further information. In the second, the decision maker has access to an experiment before choosing an action. However, the decision maker does not know the true joint distribution over states and messages. The value of the experiment as measured by the difference in the two utility levels can be negative as well as positive. We give a condition which is necessary and sufficient for the experiment to be valuable in our sense, for any decision problem.An earlier version of this paper was circulated under the title Noisy Bayes Updating and the Value of Information. We have gained from the comments of Stephen Coate, John Geanakoplos, Larry Samuelson, Timothy Van Zandt and seminar participants at Harvard Business School, Princeton, Boston University, the international conference on game theory at Stony Brook 1992 and the Winter meeting of the Econometric Society at Anaheim 1993. The first author received support for this project from NSF grant #SES-9308515 and a University of Pennsylvania Research Foundation Grant.     

Simple contracts, renegotiation under asymmetric information, and the hold-up problem

In this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a ‘simple’ contract that the parties have written ex ante. This result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold-up problem to be solved, even if the parties’ valuations are private information.     

Certainty Independence and the Separation of Utility and Beliefs

Economists often operate under an implicit assumption that the tastes of a decision maker are quite stable, while his beliefs change with the availability of new information. We show that for a general class of preferences, a separation of a key component of tastes, the utility function, from the other components of the representation is possible only if the decision maker's preferences satisfy a mild but not completely innocuous condition, called ‘certainty independence’. We also outline the axiomatic characterization of the preferences that obtain such separation, which are a subset of the biseparable preferences.     

Subjective probability over a subjective decision tree

A state space has been assumed as a primitive for modeling uncertainty, which presumes that the analyst knows all the uncertainties a decision maker (DM) perceives. This is problematic because states are private information of the DM, and hence are not directly observable to the analyst. Dekel et al. [Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934] derive, rather than assume, the subjective state space from preference over suitable choice objects.In a dynamic setting, a decision tree, that is, a pair consisting of a state space and a filtration, has been taken as a primitive. This assumption is also problematic—a decision tree should be derived rather than assumed as a primitive. We formulate a three-stage extension of the above literature in order to model a DM who anticipates subjective uncertainty to be resolved gradually over time. We identify also subjective beliefs on the subjective state space.     

After You Sir. Hold-Up,Direct Externalities,and Sequential Investment

We propose a solution to the hold-up problem: the parties in a contract can avoid the inefficiencies caused by the possibility of opportunistic behaviour and implement the first best level of investment if they make their investment decision sequentially, one party observing the choice made by the other party before making his own choice. Unlike the existing literature, the proposed solution leads to the efficient choice of investment even when there are two-sided direct externalities.Journal of Economic LiteratureClassification Numbers: D23, D82.     

A NOTE ON “A ONE‐SECTOR NEOCLASSICAL GROWTH MODEL WITH ENDOGENOUS RETIREMENT”: EXISTENCE OF MULTIPLE STEADY STATES*

This note extends Matsuyama's 0–1 endogenous retirement choice model to the framework with continuous endogenous retirement choice to study the consumption‐saving decision and capital accumulation in an overlapping generation model. The conditions for the existence of multiple steady states have been derived. In contrast to the 0 or 1 labour choice, the partial retirement may be a stable steady state under the continuous endogenous retirement choice in the second period. And this implies that partial retirement may be a stable optimal choice. Also, we find that the retirement choice depends on the initial capital stock when there are multiple steady states.     

Return migration, wage differentials, and the optimal migration duration

In simple static models, migration increases with the wage differential between host- and home-country. In a dynamic framework, and if migrations are temporary, the size of the migrant population in the host country depends also on the migration duration. This paper analyses optimal migration durations in a model which rationalises the decision of the migrant to return to his home country, despite persistently higher wages in the host country. The analysis shows that, if migrations are temporary, the optimal migration duration may decrease if the wage differential grows larger. Using micro data for Germany, the second part of the paper provides empirical evidence which is compatible with this hypothesis.     

Professional Investors as Naturalistic Decision Makers: Evidence and Market Implications

This paper is the first to examine investment decision-making from a naturalistic decision perspective. Naturalistic decision procedures tend to be used by experts making decisions in complex, ill-structured, and indeterminate situations. Survey results indicate that investment professionals, like other naturalistic decision-makers, rely heavily on mental imagery, reasoning by analogy, and decision procedures that become more intuitive as complexity increases. Also, they are "satisficers," not optimizers. In other words, their primary aim is to make an acceptable choice; finding the best choice is not necessary. Clinical training is recommended to improve the performance of investment professionals. In particular, investment professionals may benefit from training similar to that given to medical professionals wherein emphasis is placed to extensive repetitive exposure to "real world" decisions complete with plenty of immediate and unambiguous feedback.     

Recursive robust estimation and control without commitment

In a Markov decision problem with hidden state variables, a posterior distribution serves as a state variable and Bayes’ law under an approximating model gives its law of motion. A decision maker expresses fear that his model is misspecified by surrounding it with a set of alternatives that are nearby when measured by their expected log likelihood ratios (entropies). Martingales represent alternative models. A decision maker constructs a sequence of robust decision rules by pretending that a sequence of minimizing players choose increments to martingales and distortions to the prior over the hidden state. A risk sensitivity operator induces robustness to perturbations of the approximating model conditioned on the hidden state. Another risk sensitivity operator induces robustness to the prior distribution over the hidden state. We use these operators to extend the approach of Hansen and Sargent [Discounted linear exponential quadratic Gaussian control, IEEE Trans. Automat. Control 40(5) (1995) 968-971] to problems that contain hidden states.     

Preference for Flexibility and Dynamic Consistency

Dekel, Lipman, and Rustichini [3] characterize preferences over menus of lotteries that can be represented by the use of a unique subjective state space and a prior. We investigate what would be the appropriate version of Dynamic Consistency in such a setup. The condition we find, which we call Flexibility Consistency, is linked to a comparative theory of preference for flexibility. When the subjective state space is finite, we show that Flexibility Consistency is equivalent to a subjective version of Dynamic Consistency and that it implies that the decision maker is a subjective state space Bayesian updater. Later we characterize when a collection of signals can be interpreted as a partition of the subjective state space of the decision maker.     

Conditional utility

Summary The motivation for this paper starts out with a decision situation under risk where the decision-maker has to choose among various lottery tickets. We will ask what happens to a person's lottery choice if he is given additional information in terms of probabilities on some states of nature which might affect his choice among lottery tickets. In other words, in evaluating his decision situation, a person should not only consider the probability of a certain prospect to be realized but also the problem how and to which extent some state(s) of nature modify the utility of this prospect. This problem has not been dealt with in Bernoullian utility theory.We state several conditions which are necessary and sufficient to treat conditional utility as Bernoullian utility. Then we show as a main result that it is possible to represent expected utility of decision acts (in Savage's terminology) by conditional expected utility of prospects which preserves well-known properties of expected utility with the exception of linearity.We give a potential application of the notion of conditional utility to the estimation of the value of information as a residual value of prior and posterior utility.     

A systematic analysis of the links amongst the Marshallian,Hicksian, and Frischian demand functions: A note

Three types of demand functions are central to contemporary consumer theory: the Marshallian, the Hicksian, and the Frischian demand functions. This paper presents a systematic definition of the analytical relationships amongst these demand functions under the maintained hypothesis that the decision maker is a profit maximizer.     

Robust estimation and control under commitment

In a Markov decision problem with hidden state variables, a decision maker expresses fear that his model is misspecified by surrounding it with a set of alternatives that are nearby as measured by their expected log likelihood ratios (entropies). Sets of martingales represent alternative models. Within a two-player zero-sum game under commitment, a minimizing player chooses a martingale at time 0. Probability distributions that solve distorted filtering problems serve as state variables, much like the posterior in problems without concerns about misspecification. We state conditions under which an equilibrium of the zero-sum game with commitment has a recursive representation that can be cast in terms of two risk-sensitivity operators. We apply our results to a linear quadratic example that makes contact with findings of T. Ba?ar and P. Bernhard [H^∞-Optimal Control and Related Minimax Design Problems, second ed., Birkhauser, Basel, 1995] and P. Whittle [Risk-sensitive Optimal Control, Wiley, New York, 1990].     

Completing Incomplete Revealed Preference Under Limited Attention

This paper discusses how to improve the identification of the preference of a decision‐maker (DM) with limited attention proposed by Masatlioglu, Nakajima and Ozbay (2012). in “Revealed Attention”. Their identification method relies on choice reversals so the obtained revealed preference is often incomplete. We propose three approaches to address this problem. The first one is accommodating a model‐free approach, which respects the DM's choice in making a welfare analysis, as long as it does not contradict the revealed preference of Masatlioglu et al. The second approach incorporates the DM's exogenously obtained attention/inattention information into the model of Masatlioglu et al. The third approach is to take framings that influence the DM's attention into effect for the identification.     

Rational choice with status quo bias

Motivated by the empirical findings concerning the importance of one's current situation on her choice behavior, the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias, and that incorporates the standard choice theory as a special case. We follow a revealed preference approach, and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect, and that are applicable in any choice situation to which the standard (static) choice model applies.