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Information theory and behavior

Author

Listed:
  • Duncan K. Foley

    () (Department of Economics, New School for Social Research)

Abstract

The quantal response behavior widely observed in experiments and observations of human and animal behavior can be derived as expected payoff maximization subject to a constraint on the entropy of the subject's behavior mixed strategy. The Lagrange multiplier corresponding to the entropy constraint is an agent's "behavior temperature". Entropy-constrained behavior approximates payoff-maximizing behavior, but in many contexts exhibits qualitatively different outcomes. The "endowment e ect" and other instances of "loss-aversion", for example, can be seen as a consequence of entropy-constrained behavior. Identical entropy-constrained agents with the same value for a good or asset will exhibit spontaneous "noise trading". An entropy-constrained agent with a lower behavior temperature will systematically take economic surplus away from an agent with the same valuation of a good but a higher behavior temperature in bilateral transactions. The equilibrium of a standard supply-demand models with entropy-constrained agents is a non-degenerate frequency distribution of transaction prices rather than a single equilibrium price. Changes in behavior temperature can transorm social interaction games from prisoners' dilemmas to assurance games. Entropy-constrained quantal responses allow quantitative inferences about payoff changes and distribution stronger than qualitative Pareto comparisons.

Suggested Citation

  • Duncan K. Foley, 2017. "Information theory and behavior," Working Papers 1731, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1731
    as

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    File URL: http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_312017.pdf
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    References listed on IDEAS

    as
    1. Roberts, John & Sonnenschein, Hugo, 1977. "On the Foundations of the Theory of Monopolistic Competition," Econometrica, Econometric Society, vol. 45(1), pages 101-113, January.
    2. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    3. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    4. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
    5. Daniel L. McFadden, 1976. "Quantal Choice Analaysis: A Survey," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 363-390 National Bureau of Economic Research, Inc.
    6. Sethi, Rajiv, 1996. "Evolutionary stability and social norms," Journal of Economic Behavior & Organization, Elsevier, vol. 29(1), pages 113-140, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Entropy constraints; behavior temperature; statistical equilibrium; noise trading; market equilibrium;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • C0 - Mathematical and Quantitative Methods - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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