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Adaptation Through Experience or Description? Evidence from an Experiment on Efficient Coding

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  • Cary Frydman
  • Lawrence J. Jin

Abstract

The principle of efficient coding implies that the perception of monetary payoffs is shaped by the decision maker's prior beliefs. Specifically, payoffs that the decision maker expects to encounter more frequently should be perceived more accurately. Most previous tests of efficient coding rely on the decision maker's experience to shape the prior. We conduct a pre-registered experiment to test whether descriptive information about the prior affects behavior in a manner consistent with efficient coding. We randomize whether participants receive this information before the experiment begins. We find strong evidence for efficient coding; however, we detect no effect of information provision on behavior. Our results are consistent with the hypothesis that experience quickly crowds out any effect of descriptive information on optimal allocation of coding resources.

Suggested Citation

  • Cary Frydman & Lawrence J. Jin, 2025. "Adaptation Through Experience or Description? Evidence from an Experiment on Efficient Coding," NBER Working Papers 34214, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34214
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    JEL classification:

    • G0 - Financial Economics - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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