Modeling Imprecision in Perception, Valuation and Choice

Woodford, Michael

doi:10.3386/w26258

Cited by 43 publications

(51 citation statements)

References 71 publications

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“…Because evaluating incentives for future behavior is complicated, individuals may do so imperfectly, based on imperfect perception of the value of commitment contracts. This is in line with a long intellectual history of measuring and modeling stochastic valuation errors in individuals' decisions, starting from Block and Marschak (1960), continuing with Quantal Response Equilibrium (McKelvey and Palfrey, 1995), and recently gaining prominence in a variety of new approaches to bounded rationality (e.g., Woodford, 2012;Wei and Stocker, 2015;Khaw et al, 2017;Natenzon, 2019). We refer to this mechanism as imperfect perception.…”

Section: Commitment Take-up With Imperfect Perception and Demand Effectssupporting

confidence: 58%

Who Chooses Commitment? Evidence and Welfare Implications

Carrera

Royer

Stehr

et al. 2019

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A large literature treats take-up of commitment contracts, in the form of choice-set restrictions or penalties, as a smoking gun for time-inconsistency or self-control problems (for short, "present focus"). This paper develops techniques for inspecting this assumption, presents new fieldexperimental results that challenge it, and provides an alternative approach to measuring present focus. Theoretically, we show that in a standard model of quasi-hyperbolic discounting, demand for commitment is unlikely when there is some uncertainty about the future. In a field experiment with 1292 members of a fitness facility, we test for the presence of imperfect perception of contract value and experimenter demand effects in commitment contract take-up by offering contracts both for going to the gym more and for going to the gym less. We find that there is significant take-up of both types of contracts, and that individuals who take up contracts to go to the gym more are the most likely to take up contracts to go the gym less. These starkly conflicting choices are inconsistent with all standard models of present focus, and suggest that offers of commitment contracts may not be well-targeted policy tools. However, we show that a combination of belief forecasts and elicitations of willingness-to-pay for piece-rate incentives provides more robust identification of present focus and people's awareness of it. We apply the methodology to our experimental results to obtain estimates of the partially sophisticated quasihyperbolic discounting model.

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Section: Commitment Take-up With Imperfect Perception and Demand Effectssupporting

confidence: 58%

Who Chooses Commitment? Evidence and Welfare Implications

Carrera

Royer

Stehr

et al. 2019

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“…83 An important implication of both the results of Frydman and Jin, and the studies suggesting that manipulations of cognitive load can affect apparent risk aversion, is that an aspect of choice behavior commonly attributed to preferences -which are usually assumed to remain invariant across choice situations -may actually be malleable: subject to variation from one situation to another, and potentially subject to systematic influence by the designer of a choice environment. 84 The extent to which this is true should be an important topic for further study.…”

Section: Evidence Of a Connection Between Risk Aversion And Cognitivementioning

confidence: 99%

“…The efficient coding model proposed here is instead consistent with both our findings and theirs. 84 "Evolutionary" theories of the origin of preferences, such as those of Robson (2001), Rayo and Becker (2007), and Netzer (2009), suggest that this could be possible as well, though it is often unclear over what time scale the "evolution" is thought to occur in such theories.…”

Section: Evidence Of a Connection Between Risk Aversion And Cognitivementioning

confidence: 99%

“…As reviewed in Woodford (2019), the standard approach to modeling imprecision of this kind in perceptual judgments, since the work of Fechner (1860) and Thurstone (1927), attributes the randomness in perceptual judgments to randomness in internal representations of the stimulus features in the brain of the observing subject, and not necessarily to any suboptimality of the judgments that are produced on the basis of that imperfect representation of the world. Such an approach has the advantage of allowing for random variation in the responses that are given on individual occasions, while nonetheless retaining a fairly constrained specification of the nature of the randomness.…”

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confidence: 99%

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Cognitive Imprecision and Small-Stakes Risk Aversion

Khaw

Woodford

2020

The Review of Economic Studies

Self Cite

108

111

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Observed choices between risky lotteries are difficult to reconcile with expected utility maximization, both because subjects appear to be too risk averse with regard to small gambles for this to be explained by diminishing marginal utility of wealth, as stressed by Rabin (2000), and because subjects’ responses involve a random element. We propose a unified explanation for both anomalies, similar to the explanation given for related phenomena in the case of perceptual judgments: they result from judgments based on imprecise (and noisy) mental representations of the decision situation. In this model, risk aversion results from a sort of perceptual bias — but one that represents an optimal decision rule, given the limitations of the mental representation of the situation. We propose a quantitative model of the noisy mental representation of simple lotteries, based on other evidence regarding numerical cognition, and test its ability to explain the choice frequencies that we observe in a laboratory experiment.

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“…Padoa-Schioppa and Rustichini (2014) illustrate a similar concept based on adaptive coding, where neural activity is normalized according to the range of option values in the current environment, thus causing choice stochasticity to increase as representation precision decreases. Along similar lines, Woodford (2019) explains how many important aspects of economic choice (e.g., choice stochasticity, risk aversion, decoy effects) could result from noisy neural representations of value.…”

Section: Introductionmentioning

confidence: 99%

An empirical test of the role of value certainty in decision making

Lee

Coricelli

2020

Preprint

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Most contemporary models of value-based decisions are built on value estimates that are typically self-reported by the decision maker. Such models have been successful in accounting for choice accuracy and response time, and more recently choice confidence. The fundamental driver of such models is choice difficulty, which is almost always defined as the absolute value difference between the subjective value ratings of the options in a choice set. Yet a decision maker is not necessarily able to provide a value estimate with the same degree of certainty for each option that he encounters. We propose that choice difficulty is determined not only by absolute value distance of choice options, but also by their value certainty. In this study, we first demonstrate the reliability of the concept of an option-specific value certainty using three different experimental measures. We then demonstrate the influence that value certainty has on choice, including accuracy (consistency), confidence, response time, and choice-induced preference change (i.e., the degree to which value estimates change from pre-to post-choice evaluation). We conclude with a suggestion of how popular contemporary models of choice (e.g., race model, drift-diffusion model) could be improved by including option-specific value certainty as one of their inputs.

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Modeling Imprecision in Perception, Valuation and Choice

Cited by 43 publications

References 71 publications

Who Chooses Commitment? Evidence and Welfare Implications

Who Chooses Commitment? Evidence and Welfare Implications

Cognitive Imprecision and Small-Stakes Risk Aversion

An empirical test of the role of value certainty in decision making

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