We propose a theory of preferences for acquiring or avoiding information and for exposure to uncertainty (i.e., risk or ambiguity) which is based on thoughts and feelings about information as well as information gaps, that is, specific questions that the decision maker recognizes and is aware of. In our theoretical framework utility depends not just on material payoffs but also on beliefs and the attention devoted to them. We specify assumptions regarding the determinants of attention to information gaps, characterize a specific utility function that describes feelings about information gaps, and show with examples that our theory can make sense both of the acquisition of noninstrumental information and of the avoidance of possibly useful information, as well as source-specific risk and ambiguity aversion and seeking.
Abstract:We review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterized by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee. We review the economic literature relevant to such disclosure, and then discuss how different psychological factors complicate, and in some cases radically change, the economic predictions. For example, limited attention, motivated attention, and biased assessments of probability on the part of information recipients can significantly diminish, or even reverse, the intended effects of disclosure requirements. In many cases disclosure does not much affect the recipients of the information, but does significantly affect the behavior of the providers, sometimes for the better and sometimes for the worse. We review research suggesting that simplified disclosure, standardized disclosure, vivid disclosure, and social comparison information can all be used to enhance the effectiveness of disclosure policies.
Acknowledgments:We thank Saurabh Barghava, Cynthia Estlund and Daniel Schwartz for helpful comments, and Jacob Reisberg and Spencer Baugh for superb research assistance.
We provide a behavioral account of subjective performance evaluation inflation (i.e., leniency bias) and compression (i.e., centrality bias). When a manager observes noisy signals of employee performance and the manager strives to produce accurate ratings but feels worse about unfavorable errors than about favorable errors, the manager's selfishly optimal ratings will be biased upwards. Both the uncertainty about performance and the asymmetry in the manager's utility are necessary conditions for performance evaluation inflation. Moreover, the extent of the bias is increasing in the variance of the performance signal and in the asymmetry in aversion to unfair ratings. Uncertainty about performance also leads to compressed ratings. These results suggest that performance appraisals based on well-defined unambiguous criteria will have less bias. Additionally, we demonstrate that employer and employee can account for biased performance evaluations when they agree to a contract, and thus, to the extent leniency bias and centrality bias persist, these biases hurt employee performance and lower firm productivity.
Abstract:We review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterized by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee. We review the economic literature relevant to such disclosure, and then discuss how different psychological factors complicate, and in some cases radically change, the economic predictions. For example, limited attention, motivated attention, and biased assessments of probability on the part of information recipients can significantly diminish, or even reverse, the intended effects of disclosure requirements. In many cases disclosure does not much affect the recipients of the information, but does significantly affect the behavior of the providers, sometimes for the better and sometimes for the worse. We review research suggesting that simplified disclosure, standardized disclosure, vivid disclosure, and social comparison information can all be used to enhance the effectiveness of disclosure policies.
Acknowledgments:We thank Saurabh Barghava, Cynthia Estlund and Daniel Schwartz for helpful comments, and Jacob Reisberg and Spencer Baugh for superb research assistance.
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