Journal
ECONOMIC THEORY
Volume 75, Issue 3, Pages 781-802Publisher
SPRINGER
DOI: 10.1007/s00199-022-01423-7
Keywords
Imperfect recall; Bounded rationality; Bounded memory; Absent-minded; Behavioural biases
Categories
Ask authors/readers for more resources
This article examines the behavior pattern of decision-makers after receiving informative signals, uncovering two robust predictions regarding optimal behavior and introducing a new behavioral bias called "information stubbornness".
A decision-maker receives an informative signal each period and is randomly required to make a terminal action based on the signals received so far. The decision-maker is restricted to use a (stochastic) finite automaton no larger than a given size to process information. In contrast to the existing literature that focuses on very low probability of termination, I consider information structures with a (nearly) revealing signal, in which analytical solutions are available for all probability values of termination. Results from that model reveal two robust predictions regarding constrained optimal behaviour. First, it is optimal to ignore small (in terms of informativeness) signals. Second, when deterministic schemes are optimal, big signals with similar strengths should be treated similarly; otherwise, randomization takes a lexicographic order according to the strengths of the signals. I also identify a new behavioural bias, information stubbornness, according to which the decision maker does not respond to further informative signals after seeing a nearly revealing signal. As a result, the decision-maker can persistently choose the wrong action even after an unbounded number of informative signals.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available