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Separating Preferences from Endogenous Effort and Cognitive Noise in Observed Decisions

Author

Listed:
  • Belzil, Christian

    (Ecole Polytechnique, Paris)

  • Jagelka, Tomáš

    (University of Bonn)

Abstract

We develop a micro-founded framework to account for individuals' effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we find that observed decision noise responds to the costs and benefits of exerting effort on individual choice tasks as predicted by our model. We estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice.

Suggested Citation

  • Belzil, Christian & Jagelka, Tomáš, 2025. "Separating Preferences from Endogenous Effort and Cognitive Noise in Observed Decisions," IZA Discussion Papers 18315, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18315
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    References listed on IDEAS

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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