We solve a general class of dynamic rational inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased toward an optimal default rule that is independent of the realized state. The model provides the same fit to choice data as dynamic logit, but, because of the bias, yields different counterfactual predictions. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision‐making.

When an agent chooses between prospects, noise in information processing generates an effect akin to the winner's curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception pattern exhibits a key feature of prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events). This bias arises to correct for the winner's curse effect. (JEL D11, D81, D82, D83)There is considerable evidence that human perception of reality is noisy and biased.1 While randomness can be understood as a technological limitation of human cognition, systematic behavioral biases, such as those documented in the psychological experiments of Kahneman and Tversky (1979), are more puzzling. Since there is no obvious reason why natural or cultural evolution could not remove these biases, their prevalence suggests that they serve a purpose. This paper argues that perception biases arise as a second-best solution when some noise in information processing is unavoidable. In particular, we show that overweighting of small probability events optimally mitigates errors due to randomness. Our model also provides a framework for conceptualizing errors in decision making, allowing us to consider, for example, whether overweighting of small probabilities is a mistake or an optimal heuristic. Finally, our results demonstrate 1 McFadden (1999, p. 96) summarizes the experimental evidence as follows: "Humans fail to retrieve and process information consistently… These failures may be fundamental, the result of the way human memory is wired. I conclude that perception-rationality fails, and that the failures are systematic, persistent, pervasive, and large in magnitude."

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We consider a cross-calibration test of predictions by multiple potential experts in a stochastic environment. This test checks whether each expert is calibrated conditional on the predictions made by other experts. We show that this test is good in the sense that a true expert-one informed of the true distribution of the process-is guaranteed to pass the test no matter what the other potential experts do, and false experts will fail the test on all but a small (category I) set of true distributions. Furthermore, even when there is no true expert present, a test similar to cross-calibration cannot be simultaneously manipulated by multiple false experts, but at the cost of failing some true experts. Copyright Copyright 2008 by The Econometric Society.

We study how the presence of multiple participation opportunities coupled with individual learning about payoffs affects the ability of agents to coordinate efficiently in global coordination games. Two players face the option to invest irreversibly in a project in one of many rounds. The project succeeds if some underlying state variable θ is positive and both players invest, possibly asynchronously. In each round they receive informative private signals about θ, and asymptotically learn the true value of θ. Players choose in each period whether to invest or to wait for more precise information about θ.We show that with sufficiently many rounds, both players invest with arbitrarily high probability whenever investment is socially efficient, and delays in investment disappear when signals are precise. This result stands in sharp contrast to the usual static global game outcome in which players coordinate on the risk-dominant action. We provide a foundation for these results in terms of higher order beliefs. * We thank