Economic Implications of Incorrect Mental Models
Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Renee Bowen, University of California-San Diego
Mental Models and Learning
AbstractWe conduct laboratory experiments to explore the implications of incorrect mental models on the persistence of biases. We document that mental gaps that commonly arise for certain behavioral biases persist even in the presence of transparent and substantial feedback. The reason is that subjects who suffer from these biases are typically confident that they know the correct answer and unaware of the mental gap in their model of the world. This confidence results in both too little updating given information and also lower attention to information.
The Behavioral Foundations of Model Misspecification: A Decomposition
AbstractIn this paper, we link two common approaches to modeling how agents process information and update beliefs: (i) defining an updating rule that specifies a mapping from prior beliefs and the signal to the agent's subjective posterior, and (ii) modeling an agent as a Bayesian learner with a misspecified model. Our main result shows that any misspecified model can be decomposed into an updating rule and another object---a forecast---which captures how the agent anticipates future information. Moreover, we derive necessary and sufficient conditions for a forecast and updating rule to be represented by a misspecified model, and establish that this representation is unique. These conditions characterize all of the implications for belief formation implicit in the misspecified model approach. Finally, we consider two natural ways to select forecasts: introspection-proofness and naive consistency, and demonstrate their impact on belief formation.
- C7 - Game Theory and Bargaining Theory