Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model

Abstract

Decision-making requires cognitive operations, including information acquisition and information processing. Economists assume that agents act as if they were choosing these (costly) operations optimally. But models of optimal cognition pose significant conceptual challenges. Such models are generally intractable. Only very simple settings admit analytic solutions. Moreover, even computational (i.e., numerical) tractability fails as the complexity of the problem increases. In addition, models of optimal cognition suffer from the infinite regress problem: if cognition is costly, then optimizing cognition is also costly, leading one to optimize the optimization, and so on ad infinitum (John Conlisk, 1996;Barton L. Lipman, 1991;Herbert Simon, 1955).Instead of trying to model optimal cognition, we study a partially myopic and tractable alternative. The directed cognition model uses approximate option-value calculations to direct cognition to mental activities with high shadow values (Gabaix and Laibson, 2005). The current paper applies the directed cognition model to a problem of information acquisition, or search. In this context, the model assumes the following iterative search structure: At each decision point, agents act as if their next set of search operations were their last opportunity for search.Such decision-making, although partially myopic, nevertheless helps agents focus on information that is likely to be useful and ignore information that is likely to be redundant. The directed cognition model is also tractable. The model can be computationally solved in highly complex settings. The model does not suffer from the curse of dimensionality or the infinite regress problem.The current paper experimentally evaluates the directed cognition model. We find that laboratory behavior matches the predictions of the directed cognition algorithm. We begin with a relatively simple choice problem for which it is possible to compute optimal choices, and show that the directed cognition model outperforms rationality. We then turn to a complex (and

The Allocation of Time in Decision-Making

“…In contrast, if an agent has a noisy estimate of the value of an option but the option almost surely dominates its alternatives, then it is not worth taking the time to refine her estimates, because additional thinking is unlikely to change her choice. These intuitions generalize, predicting an inverse relationship between average decision time and the difference in expected value between rewards in a binary choice set (Gabaix and Laibson, 2005; Gabaix et al, 2006). The current paper tests these predictions.…”

“…Optimization theory predicts that agents will allocate more decision time to choices between options of similar expected utility than to choices between options of dissimilar expected utility (Gabaix and Laibson, 2005; Gabaix et al, 2006). Our experiments confirm this prediction.…”

“…Gabaix and Laibson (2005) and Gabaix et al (2006) predict that decisions should take the longest when the two options are similar in (discounted) value. Formally, subjects should take the most time on the trials for which the difference in the discounted values of the choices,…”

Information Acquisition Under Risky Conditions Across Real and Hypothetical Settings

“…Mouselab is a method of processtracing used by psychologists for nearly three decades, and economists more recently, because it is lower-cost alternative to eye-tracking and provides analogous measures (Costa-Gomes and Crawford 2006;Costa-Gomes, Crawford, and Broseta 2001;Gabaix et al 2006;Johnson et al 2002;Payne, Bettman, and Johnson 1988;Reutskaja et al 2011). Mouselab is a method of processtracing used by psychologists for nearly three decades, and economists more recently, because it is lower-cost alternative to eye-tracking and provides analogous measures (Costa-Gomes and Crawford 2006;Costa-Gomes, Crawford, and Broseta 2001;Gabaix et al 2006;Johnson et al 2002;Payne, Bettman, and Johnson 1988;Reutskaja et al 2011).…”

Re-Thinking Organic Food and Farming in a Changing World

“…Since Simon first coined bounded rationality as a concept, there has been much empirical evidence in support of this way of viewing decision making especially as compared to empirical evidence for unbounded rationality(Conlisk 1996;Gabaix et al 2006).…”