Abstract We study how long-lived rational agents learn from repeatedly observing a private signal and each others’ actions. With normal signals, a group of any size learns more slowly than just four agents who directly observe each others’ private signals in each period. Similar results apply to general signal structures. We identify rational groupthink—in which agents ignore their private signals and choose the same action for long periods of time—as the cause of this failure of information aggregation.

We develop an axiomatic theory of information acquisition that captures the idea of constant marginal costs in information production: the cost of generating two independent signals is the sum of their costs, and generating a signal with probability half costs half its original cost. Together with Blackwell monotonicity and a continuity condition, these axioms determine the cost of a signal up to a vector of parameters. These parameters have a clear economic interpretation and determine the difficulty of distinguishing states. (JEL D82, D83)

We model the joint distribution of choice probabilities and decision times in binary decisions as the solution to a problem of optimal sequential sampling, where the agent is uncertain of the utility of each action and pays a constant cost per unit time for gathering information. We show that choices are more likely to be correct when the agent chooses to decide quickly, provided the agent’s prior beliefs are correct. This better matches the observed correlation between decision time and choice probability than does the classical drift-diffusion model (DDM), where the agent knows the utility difference between the choices. (JEL C41, D11, D12, D83)

We study agents who are more likely to remember some experiences than others but update beliefs as if the experiences they remember are the only ones that occurred. To understand the long-run effects of selective memory, we propose selective-memory equilibrium. We show that if the agent’s behavior converges, their limit strategy is a selective-memory equilibrium, and we provide a sufficient condition for behavior to converge. We use this equilibrium concept to explore the consequences of several well-documented biases. We also show that there is a close connection between selective-memory equilibria and the outcomes of misspecified learning.

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at the division level rather than the firm level can boost employees’ effort. Our results are also consistent with personnel policies that feature egalitarian pay systems and dismissal of worst-performing employees.

Stochastic dominance is a crucial tool for the analysis of choice under risk. It is typically analyzed as a property of two gambles that are taken in isolation. We study how additional independent sources of risk (e.g., uninsurable labor risk, house price risk) can affect the ordering of gambles. We show that, perhaps surprisingly, background risk can be strong enough to render lotteries that are ranked by their expectation ranked in terms of first-order stochastic dominance. We extend our results to second-order stochastic dominance and show how they lead to a novel and elementary axiomatization of mean-variance preferences.

We use the tools of mechanism design combined with the theory of risk measures to analyze how a cash-constrained owner of an asset with known, stochastic returns raises capital from a population of investors who differ in their risk aversion and budget constraints. The issuer partitions the asset’s cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching into senior debt, junior debt, and equity. Tranching arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face. (JEL D81, D82, G12, G41, G51)

We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz 1977) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs or menus of insurance with coverage limits–premium pairs. A main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari 1987). (JEL D81, D82, D86, D91, G22)

We derive the symmetric, revenue-maximizing allocation of several units among agents who take costly actions that influence their values. The problem is equivalent to a reduced-form model where agents have nonexpected utility. The uniform-price auction and the discriminatory pay-your-bid auction with reserve prices that react to both demand and supply constitute symmetric, optimal mechanisms. We also identify a condition under which the overall optimal mechanism is indeed symmetric and illustrate the structure of the optimal asymmetric mechanism when the condition fails. The main tool in our analysis is an integral inequality based on Fan and Lorentz (1954).

The expectation is an example of a descriptive statistic that is monotone with respect to stochastic dominance, and additive for sums of independent random variables. We provide a complete characterization of such statistics, and explore a number of applications to models of individual and group decision‐making. These include a representation of stationary monotone time preferences, extending the work of Fishburn and Rubinstein (1982) to time lotteries. This extension offers a new perspective on risk attitudes toward time, as well as on the aggregation of multiple discount factors. We also offer a novel class of non‐expected utility preferences over gambles which satisfy invariance to background risk as well as betweenness, but are versatile enough to capture mixed risk attitudes.