We use four incentivized representative surveys to study the endowment effect for lotteries in 4,000 U.S. adults. We replicate the standard finding of an endowment effect—the divergence between Willingness to Accept (WTA) and Willingness to Pay (WTP), but document three new findings. First, we find little evidence that the endowment effect is related to loss aversion for risky prospects, counter to predictions of popular theories in economics. Second, WTA and WTP not only diverge, but are, at best, weakly correlated. Third, WTA and WTP strongly relate to other aspects of risk preferences. The structure of these behaviors points to different theories of the endowment effect.

We use laboratory experiments to test models of rational inattention, in which people acquire information to maximize utility net of information costs. We show that subjects adjust their attention in response to changes in incentives, in line with the rational inattention model. However, our results are qualitatively inconsistent with information costs that are linear in Shannon entropy, as is often assumed in applied work. Our data are best fit by a generalization of the Shannon model, which allows for a more flexible response to incentives and for some states of the world to be harder to distinguish than others.

Rational inattention of decision makers to costly data and information and resources affects their optimal decision making strategies. The theory of rational inattention has found applications in several areas such as economics, finance and psychology. In this paper, we study scenarios where the available data is noisy. The noise may have been generated because of inaccuracies or errors in data collection methods, or the data may have been intentionally distorted to protect private or secret information. Here we introduce a formulation for rationally inattentive decision making when the data is noisy, and derive its optimal decision making strategy. Using a stock trading problem as an example, we demonstrate that as the noise level in the data increases, probability of correct decision decreases. This results in less payoff for the decision maker, when using noisy data. We also show how the noise level and information cost parameters can be estimated using the developed formulation. The results are useful for developing decision making strategies, when using noisy data.

Choice overload - in which larger choice sets are detrimental to a chooser's well-being - is potentially of great importance in the design of economic policy. Yet the current evidence on its prevalence is inconclusive. We argue that existing tests are likely to be underpowered and hence that choice overload may occur more often than the literature suggests. We propose more powerful tests based on richer data and characterization theorems for the Random Utility Model. These new approaches come with significant econometric challenges, which we show how to address. We apply our tests to new experimental data and find strong evidence of choice overload that would likely be missed using current approaches.

We study the pattern of correlations across a large number of behavioral regularities, with the goal of creating an empirical basis for more comprehensive theories of decision-making. We elicit 21 behaviors, using an incentivized survey on a representative sample (n=1,000) of the US population. Our data show a clear and relatively simple structure underlying the correlations between these measures. Using principal components analysis, we reduce the 21 variables to six components corresponding to clear clusters of high correlations. We examine the relationship between these components, cognitive ability, and demographics. Common extant theories are not compatible with all the patterns in our data.

Two key policies for improving health outcomes in developing countries are the reduction of user fees and the engagement of community health workers. Yet questions remain about their effectiveness in particular in combination. In a randomized controlled trial in Mali we examine their effect on a variety of child and household health outcomes and behaviors. Households that received both interventions experienced improvements in a number of health measures, while those that received health worker visits engaged in more preventative behavior. Our findings suggest that the two policies may be complementary in the way they address different healthcare needs. Affiliations Mark Dean is an Associate Professor in the Department of Economics, Columbia University, New York City, NY (corresponding author): Phone: +1 212 854 3669. Email mark.dean@columbia.edu Pierre Pratley is a Health Advisor in the Health Systems Strengthening unit, KIT Royal Tropical Institute, Amsterdam, The Netherlands. Anja Sautmann is a Research Scientist at the Massachusetts Institute of Technology. Xinyi Zhang is a PhD candidate in the Department of Economics and Population Studies and Training Center, Brown University, Providence, RI All authors contributed equally to this work. Acknowledgments We would like to thank Kris Ansin, Joseph Camardo, Mariam Fofana Diallo, Diakaridia Traoré, and the team at Mali Health; Christine Blandhol, Samuel Brown, Seydou Doumbia, Andrew Foster, Emily Fuller, and Ira Wilson; and Hamadoun Bocoum, Judith Kom, Nicoló Tomaselli, and the Mali office of Innovations for Poverty Action. Manuscript file name: Mali-JHR-Final.docx

We study the joint distribution of 11 behavioral phenomena in a group of 190 laboratory subjects and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between most measures of risk and time preference, between compound lottery and ambiguity aversion, and between loss aversion and the endowment effect. Our results support some, but not all attempts to unify behavioral economic phenomena. Overconfidence and gender are also predictive of some behavioral characteristics.

We unite two basic approaches to modelling limited attention in choice by showing that the rational inattention model implies the formation of consideration sets—only a subset of the available alternatives will be considered for choice. We provide necessary and sufficient conditions for rationally inattentive behaviour which allow the identification of consideration sets. In simple settings, chosen options are those that are best on a stand-alone basis. In richer settings, the consideration set can only be identified holistically. In addition to payoffs, prior beliefs impact consideration sets. Linear inequalities identify all priors consistent with each possible consideration set.

An enormous literature documents that willingness to pay (WTP) is less than willingness to accept (WTA) a monetary amount for an object, a phenomenon called the endowment effect. Using data from an incentivized survey of a representative sample of 3,000 U.S. adults, we add one (probably) surprising additional finding: WTA and WTP for a lottery are, at best, slightly correlated. Across all participants, the correlation is slightly negative. We also collect data from published, incentivized, studies, all run on university students, to analyze the correlation between WTA and WTP, which those studies did not examine. We document a correlation of 0.15–0.2, which is consistent with the correlation for high-IQ participants in our own data. While poorly related to each other, WTA and WTP are closely related to different measures of risk aversion, and relatively stable across time. Models of reference dependence can explain the correlations we observe in our data, but only with specific parameterizations. However, these models are inconsistent with other aspects of our data, suggesting the need for more theories and empirical studies of the processes of buying and selling. JEL Classifications: C90, D81, D91

We introduce three new classes of attention cost functions: posterior separable, uniformly posterior separable, and invariant posterior separable. As with the Shannon cost function, all can be solved using Lagrangian methods. Uniformly posterior-separable cost functions capture many forms of sequential learning and hence play a key role in many applications. Invariant posterior-separable cost functions make learning strategies depend exclusively on payoff uncertainty. We introduce two behavioral axioms, Locally Invariant Posteriors and Only Payoffs Matter, which identify posterior-separable functions as uniformly and invariant posterior separable, respectively. In combination, they pinpoint the Shannon cost function.

While the right to health for all remains high on the global agenda, a burgeoning literature exists on both the advantages and disadvantages of two key demand-side strategies to overcome barriers to care: the elimination of user fees and the engagement of community health workers. In a randomized controlled trial conducted in a peri-urban area of Bamako, Mali we examined the medium-term effects of these policies on a variety of child and household health outcomes and behaviors. These include anthropometrics (weight and arm circumference), parent-reported health measures (diarrhea, blood in stool, loose stools, and overall concern), the use of preventive health measures (vaccinations, correct mosquito net use, use of chlorine tabs to disinfect water), and health knowledge on the part of the mother (ingredients in oral rehydration solution and optimal duration for exclusive breastfeeding). We report that, compared to the control group, children in households that received both free care and community health worker interventions experienced reduced rates of acute malnutrition, diarrhea and parental concern. Households who received health worker visits also increased mosquito net usage and report higher chlorine tablet use, although measured chlorine did not increase. Health knowledge increased in all treatment groups, but most dramatically in those receiving health worker visits. Our findings suggest that free care and health worker visits are not substitutes in improving child health, and may be complementary in the way they address different healthcare needs. They support calls for policy makers to mobilize concerted action to remove user fees and engage community health workers. 1 Dean (corresponding author): mark.dean@columbia.edu. Pratley: ppratley@gwu.edu. Sautmann: anja_sautmann@brown.edu. Zhang: Xinyi_Zhang@brown.edu.

Willingness to pay (WTP) and willingness to accept (WTA) a monetary amount for a lottery should be closely related. In data from an incentivized survey of a representative sample of 3,000 U.S. adults, we find that WTA and WTP for a lottery are, at best, weakly correlated. Across all respondents, the correlation is slightly negative. For the subgroups that we examine, the correlation is almost always small, typically statistically insignificant, and often negative. The exception is respondents who score highly on a within-study IQ test, where the correlation is around 0.2. A meta-study of similar lab experiments with university students also shows a correlation of around 0.15-0.2. While poorly related to each other, our measures of WTA and WTP are strongly related to different measures of risk aversion, and relatively stable across time. These various patterns allow us to show that this lack of relationship between WTA and WTP is compatible with existing theories, such as Prospect Theory and Stochastic Reference Dependence, only under very specific, and unlikely, correlational structures between parameters. We suggest a simpler formalization.

Satisficing is a hugely influential model of boundedly rational choice, yet it cannot be easily tested using standard choice data. We develop necessary and sufficient conditions for stochastic choice data to be consistent with satisficing, assuming that preferences are fixed, but search order may change randomly. The model predicts that stochastic choice can only occur amongst elements that are always chosen, while all other choices must be consistent with standard utility maximization. Adding the assumption that the probability distribution over search orders is the same for all choice sets makes the satisficing model a subset of the class of random utility models.

Two of the most well known regularities observed in preferences under risk and uncertainty are ambiguity aversion and the Allais paradox. We study the behavior of an agent who can display both tendencies simultaneously. We introduce a novel notion of preference for hedging that applies to both objective lotteries and uncertain acts. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent (i) evaluates ambiguity using multiple priors, as in the model of Gilboa and Schmeidler, 1989, and (ii) evaluates objective lotteries by distorting probabilities, as in the rank dependent utility model, but using the worst from a set of distortions. We show that a preference for hedging is not sufficient to guarantee Ellsberg-like behavior if the agent violates expected utility for objective lotteries; we provide a novel axiom that characterizes this case, linking the distortions for objective and subjective bets.

Here is an unpleasant fact about ’real life’ data. OWC (or GARP) is almost always violated. In any actual data set, be it from the laboratory or from the ’real world’, individuals will almost certainly fail the relevant axiom. Remember, one mistaken choice, one slip up, and the whole data set will fail OWC. This is problematic, as this is not a very interesting result: if we are going to classify everyone as irrational, then do we throw out all the machinery of economics, possibly due to a very small number of rogue choices? This seems too strong. Therefore, it would be nice to have some measure of how close a particular data set is from satisfying rationality. In this section, we are going to present some tools that try and put a metric on these things. It should be noted that these metrics are somewhat arbitrary, and in general lack a proper statistical grounding. A fruitful area of research might be to put these things on a firmer footing.1

Satis cing is a hugely in uential model of boundedly rational choice, yet it cannot be easily tested using standard choice data. We develop necessary and su cient conditions for stochastic choice data to be consistent with satis cing, assuming that preferences are xed, but search order may change randomly. The model predicts that stochastic choice can only occur amongst elements that are always chosen, while all other choices must be consistent with standard utility maximization. Adding the assumption that the probability distribution over search orders is the same for all choice sets makes the satis cing model a subset of the class of random utility models.

Neuroeconomics is now a well-established discipline at the intersection of neuroscience, psychology and economics, yet its influence on mainstream economics has been smaller than on the other two fields. This is in part because, unlike neuroscientists and psychologists, most economists are not interested in the process of decision making per se. We argue that neuroscience is most likely to influence economics in the short run by providing new insights into the relationships between variables that economists already study. In recent years the field has made many such contributions, using models from cognitive neuroscience to better explain choice behavior. Here we review the work that we think has great promise to contribute to economics in the near future.

The first topic that we are going to cover is the relationship between choice, preferences and utility maximization. It is worth thinking about these issues in some detail as utility maximization is the canonical model of behavior within economics. Even a lot of ‘behavioral’models start with the assumption that people maximize some sort fixed preference relation. In your first year classes, you proved two fundamental results: Just as a reminder

We estimate 11 well-studied behavioral phenomena in a group of 190 laboratory subjects (short-term discount rates, small stakes risk aversion, present bias, loss aversion, the endowment effect, aversion to ambiguity and compound lotteries, the common ratio and common consequence effects and sender/receiver behavior in trust games). We study the joint distribution of these behaviors and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between loss aversion and the endowment effect, and between probability weighting (as measured by the common ratio and common consequence effects) and risk aversion, in line with Cumulative Prospect Theory (CPT). We also find risk aversion to be related to ambiguity aversion, compound lottery aversion and discounting, consistent with the curvature of the utility function being an important determinant of all three behaviors. However, we do not find evidence that probability weighting in the risk domain is related to ambiguity and compound lottery aversion or present bias (as implied by recent extensions to CPT). Behavior in the trust game is unrelated to attitudes to risk or uncertainty. We find little relation between intelligence or personality measures and economic behavior, although we do find overconfidence to be negatively related to many behaviors (particularly ambiguity aversion) and women to be much more loss averse than men.