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On the cost of misperception: General results and behavioral applications

Author

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  • Gossner, Olivier
  • Steiner, Jakub
Abstract
In a choice model, we characterize the loss induced by misperceptions of payoff-relevant parameters across a distribution of decision problems. When the agent cannot avoid misperceptions but has some control over the distribution of errors, we show that strategies that minimize loss from misperception exhibit systematic biases, akin to some documented in the behavioral and psychological literatures. We include illusion of control, order effect, overprecision, and overweighting of small probabilities as illustrative examples.

Suggested Citation

  • Gossner, Olivier & Steiner, Jakub, 2018. "On the cost of misperception: General results and behavioral applications," Journal of Economic Theory, Elsevier, vol. 177(C), pages 816-847.
    • Handle: RePEc:eee:jetheo:v:177:y:2018:i:c:p:816-847
    DOI: 10.1016/j.jet.2018.08.003
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    2. Khan, Abhimanyu, 2022. "Expected utility versus cumulative prospect theory in an evolutionary model of bargaining," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    Memory; Bounded rationality; Perception bias; Overconfidence;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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