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Optimal Illusion of Control and Related Perception Biases

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  • Olivier Gossner

    (CREST; CNRS; Ecole polytechnique; Université Paris-Saclay; London School of Economics)

  • Jakub Steiner

    (University of Edinburgh; Cerge-Ei)

Abstract

We study perception biases arising under second-best perception strategies. An agent correctly observes a parameter that is payoff-relevant in many decision problems that she encounters in her environment but is unable to retain all the information until her decision. A designer of the decision process chooses a perception strategy that determines the distribution of the perception errors. If some information loss is unavoidable due to cognition constraints, then (under additional conditions) the optimal perception strategy exhibits the illusion of control, overconfidence, and optimism.

Suggested Citation

  • Olivier Gossner & Jakub Steiner, 2017. "Optimal Illusion of Control and Related Perception Biases," Working Papers 2017-50, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-50
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    References listed on IDEAS

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    Cited by:

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    3. Gossner, Olivier & Steiner, Jakub, 2018. "On the cost of misperception: General results and behavioral applications," Journal of Economic Theory, Elsevier, vol. 177(C), pages 816-847.

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