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Rational Misspecification: Framework and Applications

Author

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  • Eilat, Ran
  • Eliaz, Kfir

Abstract

This paper proposes a framework for assessing whether misspecified decision makers would be willing to pay for information that can potentially make them less misspecified. We introduce a prior-free approach, based on "constrained" maximal regret, to derive an upper bound on the subjective assessment of potential gains from acquiring a more accurate model. The constraint stems from the information currently available to the decision maker. We apply our approach to three prominent models of misspecified beliefs: coarse expectations, causal misperceptions and sampling equilibria.

Suggested Citation

  • Eilat, Ran & Eliaz, Kfir, 2025. "Rational Misspecification: Framework and Applications," CEPR Discussion Papers 20906, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20906
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    File URL: https://cepr.org/publications/DP20906
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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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