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Rational ignoring with unbounded cognitive capacity

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  • Berg, Nathan
  • Hoffrage, Ulrich

Abstract

In canonical decision problems with standard assumptions, we demonstrate that inversely related payoffs and probabilities can produce expected-payoff-maximizing decisions that are independent of payoff-relevant information. This phenomenon of rational ignoring, where expected-payoff maximizers ignore costless and genuinely predictive information, arises because the conditioning effects of such signals disappear on average (i.e., under the expectations operator) even though they exert non-trivial effects on payoffs and probabilities considered in isolation (i.e., before integrating). Thus, rational ignoring requires no decision costs, cognitive constraints, or other forms of bounded rationality. This implies that simple decision rules relying on small subsets of the available information can, depending on the environment in which they are used, achieve high payoffs. Ignoring information is therefore rationalizable solely as a consequence of the shape of the stochastic payoff distribution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 29 (2008)
Issue (Month): 6 (December)
Pages: 792-809

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Handle: RePEc:eee:joepsy:v:29:y:2008:i:6:p:792-809

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Web page: http://www.elsevier.com/locate/joep

Related research

Keywords: Ignoring Value of information Heuristic Bounded rationality Ecological rationality;

References

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  1. Rodepeter, Ralf & Winter, Joachim, 1999. "Rules of thumb in life-cycle savings models," Sonderforschungsbereich 504 Publications 99-81, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  2. Vernon L. Smith, 2003. "Constructivist and Ecological Rationality in Economics," American Economic Review, American Economic Association, vol. 93(3), pages 465-508, June.
  3. Laura Martignon & Ulrich Hoffrage, 2002. "Fast, frugal, and fit: Simple heuristics for paired comparison," Theory and Decision, Springer, vol. 52(1), pages 29-71, February.
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  5. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 621-54, July.
  6. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  7. Robin Hogarth & Natalia Karelaia, 2005. "Regions of rationality: Maps for bounded agents," Economics Working Papers 828, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2006.
  8. Sendhil Mullainathan, 2002. "A Memory-Based Model Of Bounded Rationality," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 735-774, August.
  9. Aghion, P. & Bolton, P. & Harris, C. & Jullien, B., 1990. "Optimal Learning By Experimentation," DELTA Working Papers 90-10, DELTA (Ecole normale supérieure).
  10. Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 1-14, January.
  11. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
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Citations

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Cited by:
  1. Berg, Nathan & Hoffrage, Ulrich, 2010. "Compressed environments: Unbounded optimizers should sometimes ignore information," MPRA Paper 26372, University Library of Munich, Germany.
  2. Berg, Nathan, 2010. "Success from Satisficing and Imitation: Entrepreneurs’ Location Choice and Implications of Heuristics for Local Economic Development," MPRA Paper 26594, University Library of Munich, Germany.
  3. Martin Binder, 2014. "Should evolutionary economists embrace libertarian paternalism?," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 515-539, July.
  4. Osimani, Barbara, 2012. "Risk information processing and rational ignoring in the health context," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(2), pages 169-179.
  5. Nathan Berg & G. Biele & Gerd Gigerenzer, 2013. "Does Consistency Predict Accuracy of Beliefs?: Economists Surveyed About PSA," Working Papers 1308, University of Otago, Department of Economics, revised Apr 2013.
  6. Monti, Marco & Pelligra, Vittorio & Martignon, Laura & Berg, Nathan, 2014. "Retail investors and financial advisors: New evidence on trust and advice taking heuristics," Journal of Business Research, Elsevier, vol. 67(8), pages 1749-1757.
  7. Flynn, Sean Masaki & Donnelly, Michael, 2012. "Does labor contract completeness drive unionization? Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 445-454.
  8. Marco Monti & Riccardo Boero & Nathan Berg & Gerd Gigerenzer & Laura Martignon, 2012. "How do common investors behave? Information search and portfolio choice among bank customers and university students," Mind and Society: Cognitive Studies in Economics and Social Sciences, Fondazione Rosselli, vol. 11(2), pages 203-233, December.
  9. Berg, Nathan & Gigerenzer, Gerd, 2010. "As-if behavioral economics: Neoclassical economics in disguise?," MPRA Paper 26586, University Library of Munich, Germany.

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