We relate two main representations of the cost of acquiring information: a cost that depends on the experiment performed, as in statistical decision theory, and a cost that depends on the distribution of posterior beliefs, as in applications of rational inattention. We show that in many cases of interest, posterior-based costs are inconsistent with a primitive model of costly experimentation. The inconsistency is at the core of known limits to the application of rational inattention in games and, more broadly, in equilibrium analyses where beliefs are endogenous; we show that an experiment-based approach helps to understand and overcome these difficulties. (JEL D82, D83)

People who are members of a group and identify with it behave differently from people who perceive themselves as isolated individuals. This paper shows that group membership affects preferences over outcomes, and saliency of the group affects the perception of the environment. We manipulate the saliency of group membership by letting a player's own group watch as a passive audience as decisions are made, and/or by making part of the payoff common for members of the group. In contrast to the minimal-group paradigm, minimal groups alone do not affect behavior in our strategic environments. However, salient group membership significantly increases the aggressive stance of the hosts (people who have their group members in the audience), and tends to reduce that of the guests. (JEL D71, Z13)

A model of trade with m buyers and m sellers is considered in which price is set to equate revealed demand and supply. In a Bayesian Nash equilibrium, each trader acts not as a price-taker, but instead misrepresents his true demand/supply to influence price in his favor. This causes inefficiency. We show that in any equilibrium the amount by which a trader misreports is O(1/m) and the corresponding inefficiency is O(1/m2). The indeterminacy and the inefficiency that is caused by the traders' bargaining behavior in small markets thus rapidly vanishes as the market increases in size.

Abstract We study how strategic interaction and cooperation are affected by the heterogeneity of cognitive skills of groups of players, over consecutive plays of repeated games with randomly matched opponents using Prisoner’s Dilemma as stage game. We observe overall higher cooperation rates and average final payoffs in integrated treatment groups—where subjects of different IQ levels interact together—than in separated treatment groups. Lower IQ subjects are better off and higher IQ subjects are worse off in integrated groups than in separated groups. Higher IQ subjects adopt harsher strategies when they are pooled with lower IQ subjects than when they play separately. We demonstrate that this outcome should be expected in learning and evolutionary models where higher intelligence subjects exhibit lower frequency of errors in the implementation of strategies. Estimations of errors and strategies in our experimental data are consistent with the model’s assumptions and predictions.

We provide experimental evidence that subjects blame others on the basis of events they are not responsible for. In our experiment an agent chooses between a lottery and a safe asset; payment from the chosen option goes to a principal, who then decides how much to allocate between the agent and a third party. We observe widespread blame: regardless of their choice, agents are blamed by principals for the outcome of the lottery, an event they are not responsible for. We provide an explanation of this apparently irrational behavior with a delegated-expertise principal-agent model, the subjects’ salient perturbation of the environment.

We characterize, in the Anscombe–Aumann framework, the preferences for which there are a utility functionu on outcomes and an ambiguity indexc on the set of probabilities on the states of the world such that, for all acts f and g, . The function u represents the decision maker's risk attitudes, while the index c captures his ambiguity attitudes. These preferences include the multiple priors preferences of Gilboa and Schmeidler and the multiplier preferences of Hansen and Sargent. This provides a rigorous decision-theoretic foundation for the latter model, which has been widely used in macroeconomics and finance.

Abstract We provide two characterizations, one axiomatic and the other neuro-computational, of the dependence of choice probabilities on deadlines, within the widely used softmax representation $$\beginalign* p_t\left( a,A\right) =\dfrace^\fracu\left( a\right) λ\left( t\right) +α\left( a\right) \sum_b\in Ae^\fracu\left( b\right) λ\left( t\right) +α\left( b\right) , \endalign*$$ where $p_t\left( a,A\right)$ is the probability that alternative a is selected from the set A of feasible alternatives if t is the time available to decide, λ is a time-dependent noise parameter measuring the unit cost of information, u is a time-independent utility function, and α is an alternative-specific bias that determines the initial choice probabilities (reflecting prior information and memory anchoring). Our axiomatic analysis provides a behavioural foundation of softmax (also known as Multinomial Logit Model when α is constant). Our neuro-computational derivation provides a biologically inspired algorithm that may explain the emergence of softmax in choice behaviour. Jointly, the two approaches provide a thorough understanding of softmaximization in terms of internal causes (neuro-physiological mechanisms) and external effects (testable implications).

We study how intelligence and personality affect the outcomes of groups, focusing on repeated interactions that provide the opportunity for profitable cooperation. Our experimental method creates two groups of subjects who have different levels of certain traits, such as higher or lower levels of Intelligence, Conscientiousness, and Agreeableness, but who are very similar otherwise. Intelligence has a large and positive long-run effect on cooperative behavior. The effect is strong when at the equilibrium of the repeated game there is a trade-off between short-run gains and long-run losses. Conscientiousness and Agreeableness have a natural, significant but transitory effect on cooperation rates.

We extend a standard model of parental investment and intergenerational mobility to include a fully specified genetic analysis of skill transmission. The model’s predictions differ substantially from the standard model’s. The coefficient of intergenerational income elasticity (IGE) may be larger than that in the standard model and depends on the distribution of the genotype. The distribution of genetic endowments may be stratified according to income. The model is tested on data, including genetic information, of twins and their parents, estimating how IGE is affected by genetic factors and how environment and genes interact. The effect of intelligence is substantially stronger than that of other traits.