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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.

Suggested Citation

  • Andrew Caplin & Daniel Martin, 2011. "A Testable Theory of Imperfect Perception," NBER Working Papers 17163, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17163
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    References listed on IDEAS

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    Cited by:

    1. Bergemann, Dirk & Morris, Stephen, 2016. "Bayes correlated equilibrium and the comparison of information structures in games," Theoretical Economics, Econometric Society, vol. 11(2), May.
    2. Andrew Caplin & Mark Dean & John Leahy, 2017. "Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy," NBER Working Papers 23652, National Bureau of Economic Research, Inc.
    3. Tamer Boyaci & Yalçin Akçay, 2016. "Pricing when customers have limited attention," ESMT Research Working Papers ESMT-16-01, ESMT European School of Management and Technology, revised 19 Jan 2017.
    4. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    5. Dirk Bergemann & Stephen Morris, 2013. "Bayes Correlated Equilibrium and the Comparison of Information Structures," Levine's Working Paper Archive 786969000000000725, David K. Levine.
    6. Cunningham, Thomas, 2013. "Biases and Implicit Knowledge," MPRA Paper 50292, University Library of Munich, Germany.
    7. repec:eee:gamebe:v:104:y:2017:i:c:p:131-145 is not listed on IDEAS
    8. Sandro Ambuehl, 2017. "An Offer You Can't Refuse? Incentives Change How We Inform Ourselves and What We Believe," CESifo Working Paper Series 6296, CESifo Group Munich.
    9. Dirk Bergemann & Stephen Morris, 2011. "Correlated Equilibrium in Games with Incomplete Information," Levine's Working Paper Archive 786969000000000265, David K. Levine.
    10. Dirk Bergemann & Stephen Morris, 2013. "The Comparison of Information Structures in Games: Bayes Correlated Equilibrium and Individual Sufficiency," Levine's Working Paper Archive 786969000000000730, David K. Levine.
    11. Altmann, Steffen & Falk, Armin & Grunewald, Andreas, 2015. "Incentives and Information as Driving Forces of Default Effects," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 516, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    12. Andrew Caplin & Mark Dean, 2015. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," American Economic Review, American Economic Association, vol. 105(7), pages 2183-2203, July.
    13. Tom Cunningham & Jonathan de Quidt, 2016. "Implicit Preferences Inferred from Choice," CESifo Working Paper Series 5704, CESifo Group Munich.
    14. Lunn, Pete & Somerville, Jason J., 2015. "Surplus Identification with Non-Linear Returns," Papers WP522, Economic and Social Research Institute (ESRI).
    15. Caplin, Andrew, 2014. "Rational inattention and revealed preference: The data-theoretic approach to economic modeling," Research in Economics, Elsevier, vol. 68(4), pages 295-305.
    16. Delavande, Adeline & Zafar, Basit, 2012. "Information and anti-American attitudes," Staff Reports 558, Federal Reserve Bank of New York, revised 01 Sep 2015.
    17. 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).

    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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