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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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Publication status: published as Caplin, Andrew, and Daniel Martin (2014), “A Testable Theory of Imperfect Perception,” The Economic Journal, forthcoming.
Handle: RePEc:nbr:nberwo:17163

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  1. Haluk Ergin & Todd Sarver, 2010. "A Unique Costly Contemplation Representation," Econometrica, Econometric Society, vol. 78(4), pages 1285-1339, 07.
  2. Faruk Gul & Wolfgang Pesendorfer, 2005. "Random Expected Utility," Levine's Bibliography 122247000000000834, UCLA Department of Economics.
  3. 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.
  4. Nicola Gennaioli & Andrei Shleifer, 2009. "What Comes to Mind," NBER Working Papers 15084, National Bureau of Economic Research, Inc.
  5. Rabin, Matthew & Weizsäcker, Georg, 2007. "Narrow Bracketing and Dominated Choices," IZA Discussion Papers 3040, Institute for the Study of Labor (IZA).
  6. Caplin, Andrew & Dean, Mark, 2011. "Search, choice, and revealed preference," Theoretical Economics, Econometric Society, vol. 6(1), January.
  7. Paola Manzini & Marco Mariotti, 2007. "Sequentially Rationalizable Choice," American Economic Review, American Economic Association, vol. 97(5), pages 1824-1839, December.
  8. Nakajima, Daisuke & Masatlioglu, Yusufcan, 2013. "Choice by iterative search," Theoretical Economics, Econometric Society, vol. 8(3), September.
  9. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  10. Yuval Salant & Ariel Rubinstein, 2008. "(A, f): Choice with Frames -super-1," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1287-1296.
  11. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  12. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
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Cited by:
  1. Dirk Bergemann & Stephen Morris, 2013. "The Comparison of Information Structures in Games: Bayes Correlated Equilibrium and Individual Sufficiency," Cowles Foundation Discussion Papers 1909R, Cowles Foundation for Research in Economics, Yale University, revised May 2014.
  2. Dirk Bergemann & Stephen Morris, 2013. "Bayes Correlated Equilibrium and the Comparison of Information Structures," Cowles Foundation Discussion Papers 1822R, Cowles Foundation for Research in Economics, Yale University.
  3. Cunningham, Thomas, 2013. "Biases and Implicit Knowledge," MPRA Paper 50292, University Library of Munich, Germany.
  4. Altmann, Steffen & Falk, Armin & Grunewald, Andreas, 2013. "Incentives and Information as Driving Forces of Default Effects," IZA Discussion Papers 7610, Institute for the Study of Labor (IZA).
  5. Dirk Bergemann & Stephen Morris, 2011. "Correlated Equilibrium in Games with Incomplete Information," Levine's Working Paper Archive 786969000000000265, David K. Levine.
  6. 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.
  7. Andrew Caplin & Mark Dean, 2014. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," NBER Working Papers 19876, National Bureau of Economic Research, Inc.

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