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A Testable Theory of Imperfect Perception

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  • Andrew Caplin
  • Daniel Martin

Abstract

We introduce a rational choice theory that allows for many forms of imperfect perception, including failures of memory, selective attention, and adherence to simplifying rules of thumb. Despite its generality, the theory has strong, simple, and intuitive implications for standard choice data and for more enriched choice data. The central assumption is rational expectations: decision makers understand the relationship between their perceptions, however limited they may be, and the (stochastic) consequences of their available choices. Our theory separately identifies two distinct "framing" effects: standard effects involving the layout of the prizes (e.g. order in a list) and novel effects relating to the information content of the environment (e.g. how likely is the first in the list to be the best). Simple experimental tests both affirm the basic model and confirm the existence of information-based framing effects.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17163.

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Date of creation: Jun 2011
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Handle: RePEc:nbr:nberwo:17163

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  1. Elena Reutskaja & Rosemarie Nagel & Colin F. Camerer & Antonio Rangel, 2011. "Search Dynamics in Consumer Choice under Time Pressure: An Eye-Tracking Study," American Economic Review, American Economic Association, vol. 101(2), pages 900-926, April.
  2. Paola Manzini & Marco Mariotti, 2007. "Sequentially Rationalizable Choice," American Economic Review, American Economic Association, vol. 97(5), pages 1824-1839, December.
  3. Yuval Salant & Ariel Rubinstein, 2008. "("A", "f"): Choice with Frames," Review of Economic Studies, Wiley Blackwell, vol. 75(4), pages 1287-1296, October.
  4. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  5. Faruk Gul & Wolfgang Pesendorfer, 2005. "Random Expected Utility," Levine's Bibliography 122247000000000834, UCLA Department of Economics.
  6. Caplin, Andrew & Dean, Mark, 2011. "Search, choice, and revealed preference," Theoretical Economics, Econometric Society, vol. 6(1), January.
  7. Nicola Gennaioli & Andrei Shleifer, 2009. "What comes to mind," Economics Working Papers 1186, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2009.
  8. Nakajima, Daisuke & Masatlioglu, Yusufcan, 0. "Choice by iterative search," Theoretical Economics, Econometric Society.
  9. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  10. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  11. Rabin, Matthew & Weizsäcker, Georg, 2007. "Narrow Bracketing and Dominated Choices," IZA Discussion Papers 3040, Institute for the Study of Labor (IZA).
  12. Haluk Ergin & Todd Sarver, 2010. "A Unique Costly Contemplation Representation," Econometrica, Econometric Society, vol. 78(4), pages 1285-1339, 07.
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Cited by:
  1. Dirk Bergemann & Stephen Morris, 2011. "Correlated Equilibrium in Games with Incomplete Information," Levine's Working Paper Archive 786969000000000265, David K. Levine.
  2. Adeline Delavande & Basit Zafar, 2012. "How deeply held are anti-American attitudes among Pakistani youth? Evidence using experimental variation in information," Staff Reports 558, Federal Reserve Bank of New York.

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