On the cost of misperception: General results and behavioral applications

Olivier Gossner, Jakub Steiner

Research output: Contribution to journalArticlepeer-review

Abstract

In a choice model, we characterize the loss induced by misperceptions of payoff-relevant parameters across a distribution of decision problems. When the agent cannot avoid misperceptions but has some control over the distribution of errors, we show that strategies that minimize loss from misperception exhibit systematic biases, akin to some documented in the behavioral and psychological literatures. We include illusion of control, order effect, overprecision, and overweighting of small probabilities as illustrative examples.

Original languageEnglish (US)
Pages (from-to)816-847
Number of pages32
JournalJournal of Economic Theory
Volume177
DOIs
StatePublished - Sep 2018

Keywords

  • Bounded rationality
  • Memory
  • Overconfidence
  • Perception bias

ASJC Scopus subject areas

  • Economics and Econometrics

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