Foundations of Behavioral Economics, Bounded Rationality, Economics and Statistics, Choice Theory

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13. Statistical Inference in Games, with Josh Cherry, Econometrica, 88 (2020), No. 4, 1725-1752

We consider statistical inference in games. Each player obtains a small random sample of other playersן¿½ actions, uses statistical inference to estimate their actions, and chooses an optimal action based on the estimate. In a Sampling Equilibrium with Statistical Inference (SESI), the sample is drawn from the distribution of players' actions based on this process. We characterize the set of SESIs in large two-action games, and compare their predictions to those of Nash Equilibrium, and for different sample sizes and statistical inference procedures. We then study applications to competitive markets, markets with network effects, monopoly pricing, and search and matching markets.

12. The Effect of Product Misperception on Economic Outcomes: Evidence from the Extended Warranty Market, with Jose Miguel Abito, Review of Economic Studies, 86 (2019), No. 6, 2285-2318

Panel and experimental data are used to analyze the economic outcomes in the extended warranty market. We establish that the strong demand and high profits in this market are driven by consumers distorting the failure probability of the insured product, rather than standard risk aversion or sellers' market power. Providing information to consumers about failure probabilities significantly reduces their willingness to pay for warranties, indicating the important role of information, or lack of, in driving consumers' purchase behavior. Such information provision is shown to be more effective in enhancing consumer welfare than additional market competition.

11. The Effect of Limited Availability on Childrenן¿½s Consumption, Engagement, and Choice Behavior, with Michal Maimaran, Judgment and Decision Making, 14 (2019), No. 1, 72-79

Three studies examine the effect of limited availability on the engagement, consumption, and choice behavior of four- to five-year old children. It is shown that children engage longer in an activity when the activity is presented as limited in time and consume more of a particular food when the food is presented as limited in quantity. It is also shown that the consumption ratio of a less preferred food to a more preferred one increases when the less preferred food is presented as limited in quantity. Finally, children are more likely to choose a less preferred option over a more preferred one when the less preferred option becomes less available.

10. Contracts with Framing, with Ron Siegel, American Economic Journal: Microeconomics, 10 (2018), No. 3, 315-346

We study a model of contracts in which a profit-maximizing seller uses framing to influence buyers' purchase behavior. Framing temporarily affects how buyers evaluate different products, and buyers can renege on their purchases after the framing effect wears off. We characterize the optimal contracts with framing and their welfare properties in several settings. Framing that is not too strong reduces total welfare in regulated markets with homogenous buyers, but increases total welfare in markets with heterogenous buyers when the proportion of buyers with low willingness to pay is small.

9. Isn't everyone like me?: On the presence of self-similarity in strategic interactions, with Ariel Rubinstein, Judgment and Decision Making, 11 (2016), No. 2, 168-173

We propose that in strategic interactions a player is influenced by self-similarity, i.e., he tends to believe that other players will choose the same action that he does to a greater extent than players who choose any other action. To demonstrate this, we asked participants to report their beliefs in a two-player two-action symmetric game with the feature that there should be negative correlation between a player's action and the probability he assigns to his opponent choosing the same action. We find that players' reported beliefs exhibit the opposite pattern, i.e., they are more likely to choose an action the stronger is their belief that their opponent will also choose the same action. We view this pattern as evidence for the presence of self-similarity.

8. Reallocation Costs and Efficiency, with Ron Siegel, American Economic Journal: Microeconomics, 8 (2015), No. 1, 203-227

We study the efficient allocation of a divisible asset when reallocation is costly. Two players initially divide an asset between them. At the time of this initial division the players' valuations for the asset are uncertain. After the uncertainty resolves, costly reallocation may take place. We first establish that the surplus associated with efficient reallocation monotonically increases or decreases in the concentration of the initial division for a wide range of cost specifications. We then characterize how the budget necessary to implement the efficient reallocation changes with the initial division.

7.On the Causes and Consequences of Ballot Order-Effects, with Marc Meredith, Political Behavior, 35 (2013), No. 1, 175-197

Featured in the Wall Street Journal (online and print), Chicago Tribune (online and print), Postmedia News

We investigate the effect of ballot order on the outcomes of California city council and school board elections. Candidates listed first win office between four and five percentage points more often than expected absent order effects. This first candidate advantage is larger in races with more candidates and for higher quality candidates. The first candidate advantage is similar across contexts: the magnitude of the effect is not statistically distinguishable in city council and in school board elections, in races with and without an open seat, and in races consolidated and not consolidated with statewide general elections. Standard satisficing models cannot fully explain ballot order effects in our dataset of multi-winner elections.

6. Eliciting Welfare Preferences from Behavioral Datasets, with Ariel Rubinstein, Review of Economic Studies, 79 (2012), No. 1, 375-387

An individual displays various preference orderings in different payoff-irrelevant circumstances. It is assumed that the variation in the observed preference orderings is the outcome of some cognitive process that distorts the underlying preferences of the individual. We introduce a framework for eliciting the individual's underlying preferences in such cases, and then demonstrate it for two cognitive processes -- satisficing and small assessment errors.

5. Procedural Analysis of Choice Rules with Applications to Bounded Rationality, American Economic Review, 101 (2011), No. 2, 724-748

I study how limited abilities to process information affect choice behavior. I model the decision making process by an automaton, and measure the complexity of a specific choice rule by the minimal number of states an automaton implementing the rule uses to process information. I establish that any choice rule that is less complicated than utility maximization displays framing effects. I then prove that choice rules that result from an optimal tradeoff between maximizing utility and minimizing complexity are history-dependent satisficing procedures that display primacy and recency effects.

4. ( A , f ): Choice with Frames, with Ariel Rubinstein, Review of Economic Studies, 75 (2008), No. 4, 1287-1296

We develop a framework for modeling choice in the presence of framing effects. An extended choice function assigns a chosen element to every pair (A , f ) where A is a set of alternatives and f is a frame. A frame includes observable information that is irrelevant in the rational assessment of the alternatives, but nonetheless affects choice. We relate the new framework to the classical model of choice correspondence. Conditions are identified under which there exists either a transitive or a transitive and complete binary relation R such that an alternative x is chosen in some (A , f ) iff x is R-maximal in the set A. We then demonstrate that the framework of choice correspondence misses information, which is essential to economic modeling and which is incorporated in the extended choice function.

3. Some Thoughts on the Principle of Revealed Preference, with Ariel Rubinstein, In Handbooks of Economic Methodologies (Andrew Caplin and Andrew Schotter, eds.), New York: Oxford University Press, 2008, 115-124

The Principle of Revealed Preference is a methodological paradigm whereby observed choices of an individual are used only to reveal her mental preferences. We make three statements about the way that economists view this principle as a modeling guide. First, we argue that there is no escape from including mental entities such as mental preferences in addition to observed choices in economic models. Second, we assert that economists should be looking at models in which an observed choice leads to conclusions other than that the chosen element is always mentally preferred to the other elements in the choice problem. Finally, we claim that there is room for models of choice in which the observable information about a choice situation is richer than just the set of available alternatives and the alternative chosen.

2. On the Learnability of Majority Rule, Journal of Economic Theory, 135 (2007), No. 1, 196-213

I establish how large a sample of past decisions is required to predict future decisions of a committee with few members. The committee uses majority rule to choose between pairs of alternatives. Each member’s vote is derived from a linear ordering over all the alternatives. I prove that there are cases in which an observer cannot predict precisely any decision of a committee based on its past decisions. Nonetheless, approximate prediction is possible after observing relatively few random past decisions.

1. A Model of Choice from Lists, with Ariel Rubinstein, Theoretical Economics, 1 (2006), No. 1, 3-17

The standard economic choice model assumes that the decision maker chooses from sets of alternatives. In contrast, we analyze a choice model in which the decision maker encounters the alternatives in the form of a list. We present two axioms similar in nature to the classical axioms of choice from sets. We show that they characterize all the choice functions from lists that involve the choice of either the first or the last optimal alternative in the list according to some preference relation. We then relate choice functions from lists to the classical notions of choice correspondences and random choice functions.

14. Optimal Sample Sizes and Statistical Decision Rules, with Sanket Patil, Forthcoming at Theoretical Economics

A statistical decision rule is a mapping from data to actions induced by statistical inference on the data. We characterize these rules for data that are chosen strategically in persuasion environments. A designer wishes to persuade a decision maker (DM) to take a particular action and decides how many Bernoulli experiments about a parameter of interest the DM can obtain. After obtaining these data and estimating the parameter value, the DM chooses to take the action if the estimated value exceeds some threshold. We establish that as the threshold changes, the resulting statistical decision rules in many environments are either simple majority or reverse unanimity.

15. Complexity and Satisficing: Theory and Evidence from Chess, with Jörg Spenkuch, R&R at the Review of Economic Studies

We develop a satisficing model of choice in which the available alternatives differ in their inherent complexity. We assume---and experimentally validate---that complexity leads to errors in the perception of alternatives' values. The model yields sharp predictions about the effect of complexity on choice probabilities, some of which qualitatively contrast with those of maximization-based choice models. We confirm the predictions of the satisficing model---and thus reject maximization---in a novel data set with information on hundreds of millions of real-world chess moves by highly experienced players. These findings point to the importance of complexity and satisficing for decision making outside of the laboratory.