1932

Abstract

This review presents an approach to modeling decision making under misspecified subjective models. The approach is based on the idea that decision makers impose subjective causal interpretations on observed correlations, and it borrows basic concepts and tools from the statistics and artificial intelligence literatures on Bayesian networks. While these background literatures used Bayesian networks as a platform for normative and computational analysis of probabilistic and causal inference, in the framework proposed here graphical models represent causal misperceptions and help analyze their behavioral implications. I show how this approach sheds light on earlier equilibrium models with nonrational expectations and demonstrate its scope of economic applications.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-072219-111921
2020-08-02
2024-06-19
Loading full text...

Full text loading...

/deliver/fulltext/economics/12/1/annurev-economics-072219-111921.html?itemId=/content/journals/10.1146/annurev-economics-072219-111921&mimeType=html&fmt=ahah

Literature Cited

  1. Angrist J, Pischke J. 2008. Mostly Harmless Econometrics: An Empiricist's Companion Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  2. Antler Y. 2018. Multilevel marketing: pyramid-shaped schemes or exploitative scams? Unpublished manuscript, Univ. Essex Colchester, UK:
    [Google Scholar]
  3. Antler Y, Bachi B. 2019. Searching forever after Unpublished manuscript, Univ. Essex Colchester, UK:
    [Google Scholar]
  4. Barro R, Gordon D. 1983. Rules, discretion and reputation in a model of monetary policy. J. Monet. Econ. 12:101–21
    [Google Scholar]
  5. Berk R. 1966. Limiting behavior of posterior distributions when the model is incorrect. Ann. Math. Stat. 37:51–58
    [Google Scholar]
  6. Borjas G. 1987. Self-selection and the earnings of immigrants NBER Work. Pap2248
    [Google Scholar]
  7. Cowell R, Dawid P, Lauritzen S, Spiegelhalter D 1999. Probabilistic Networks and Expert Systems London: Springer
    [Google Scholar]
  8. Eliaz K, Spiegler R. 2006. Contracting with diversely naive agents. Rev. Econ. Stud. 73:689–714
    [Google Scholar]
  9. Eliaz K, Spiegler R. 2018. A model of competing narratives Unpublished manuscript, Tel Aviv Univ., Tel Aviv Israel:
    [Google Scholar]
  10. Eliaz K, Spiegler R, Thysen H 2018. Strategic interpretations Unpublished manuscript, Tel Aviv Univ., Tel Aviv Israel:
    [Google Scholar]
  11. Eliaz K, Spiegler R, Weiss Y 2019. Cheating with (causal) models Unpublished manuscript, Tel Aviv Univ., Tel Aviv Israel:
    [Google Scholar]
  12. Esponda I. 2008. Behavioral equilibrium in economies with adverse selection. Am. Econ. Rev. 98:1269–91
    [Google Scholar]
  13. Esponda I, Pouzo D. 2014. Conditional retrospective voting in large elections. Am. Econ. J. Microecon. 9:54–75
    [Google Scholar]
  14. Esponda I, Pouzo D. 2016. Berk–Nash equilibrium: a framework for modeling agents with misspecified models. Econometrica 84:1093–130
    [Google Scholar]
  15. Esponda I, Pouzo D. 2019. Equilibrium in misspecified Markov decision processes Unpublished manuscript, Washington Univ. St. Louis St. Louis, MO:
    [Google Scholar]
  16. Esponda I, Vespa E. 2014. Hypothetical thinking and information extraction in the laboratory. Am. Econ. J. Microecon. 6:180–202
    [Google Scholar]
  17. Ettinger D, Jehiel P. 2010. A theory of deception. Am. Econ. J. Microecon. 2:1–20
    [Google Scholar]
  18. Evans G, Honkapohja S. 2001. Learning and Expectations in Macroeconomics Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  19. Eyster E, Piccione M. 2013. An approach to asset pricing under incomplete and diverse perceptions. Econometrica 81:1483–506
    [Google Scholar]
  20. Eyster E, Rabin M. 2005. Cursed equilibrium. Econometrica 73:1623–72
    [Google Scholar]
  21. Eyster E, Rabin M. 2010. Naive herding in rich-information settings. Am. Econ. J. Microecon. 2:221–43
    [Google Scholar]
  22. Frydenberg M. 1990. The chain graph Markov property. Scand. J. Stat. 17:333–53
    [Google Scholar]
  23. Geanakoplos J, Polemarchakis H. 1982. We can't disagree forever. J. Econ. Theory 27:192–200
    [Google Scholar]
  24. Geiger D, Verma T, Pearl J 1990. Identifying independence in Bayesian networks. Networks 20:507–34
    [Google Scholar]
  25. Hajek P, Havranek T, Jirousek R 1992. Uncertain Information Processing in Expert Systems Boca Raton, FL: CRC Press
    [Google Scholar]
  26. Harris J. 1998. The Nurture Assumption London: Bloomsbury
    [Google Scholar]
  27. Heckman J, Pinto R. 2015. Causal analysis after Haavelmo. Econom. Theory 31:115–51
    [Google Scholar]
  28. Heidhues P, Kőszegi B, Strack P 2018. Unrealistic expectations and misguided learning. Econometrica 86:1159–214
    [Google Scholar]
  29. Holmstrom B. 1979. Moral hazard and observability. Bell J. Econ. 10:74–91
    [Google Scholar]
  30. Imbens G. 2019. Potential outcome and directed acyclic graph approaches to causality: relevance for empirical practice in economics arXiv 1907.07271 [stat.ME]
    [Google Scholar]
  31. Jaynes ET. 1957. Information theory and statistical mechanics. Phys. Rev. 106:620–30
    [Google Scholar]
  32. Jehiel P. 2005. Analogy-based expectation equilibrium. J. Econ. Theory 123:81–104
    [Google Scholar]
  33. Jehiel P. 2011. Manipulative auction design. Theor. Econ. 6:185–217
    [Google Scholar]
  34. Jehiel P. 2018. Investment strategy and selection bias: an equilibrium perspective on overoptimism. Am. Econ. Rev. 108:1582–97
    [Google Scholar]
  35. Jehiel P, Koessler F. 2008. Revisiting games of incomplete information with analogy-based expectations. Games Econ. Behav. 62:533–57
    [Google Scholar]
  36. Jehiel P, Samet D. 2007. Valuation equilibrium. Theor. Econ. 2:163–85
    [Google Scholar]
  37. Jehiel P, Samuelson L. 2012. Reputation with analogical reasoning. Q. J. Econ. 127:1927–69
    [Google Scholar]
  38. Koller D, Friedman N. 2009. Probabilistic Graphical Models: Principles and Techniques Cambridge, MA: MIT Press
    [Google Scholar]
  39. Kondor P, Kőszegi B. 2015. Cursed financial innovation WZB Discuss. Pap., Wiss. Berlin Sozialforschung Berlin:
    [Google Scholar]
  40. Kőszegi B. 2010. Utility from anticipation and personal equilibrium. Econ. Theory 44:415–44
    [Google Scholar]
  41. Kőszegi B. 2014. Behavioral contract theory. J. Econ. Lit. 52:1075–118
    [Google Scholar]
  42. Kydland F, Prescott E. 1977. Rules rather than discretion: the inconsistency of optimal plans. J. Political Econ. 85:473–91
    [Google Scholar]
  43. Langer E. 1975. The illusion of control. J. Pers. Soc. Psychol. 32:311–28
    [Google Scholar]
  44. Lucas R. 1972. Expectations and the neutrality of money. J. Econ. Theory 4:103–24
    [Google Scholar]
  45. Mailath G, Samuelson L. 2018. The wisdom of a confused crowd: model based inference Cowles Found. Discuss. Pap. 2161, Yale Univ New Haven, CT:
    [Google Scholar]
  46. Mullainathan S, Schwartzstein J, Shleifer A 2008. Coarse thinking and persuasion. Q. J. Econ. 123:577–619
    [Google Scholar]
  47. Osborne M, Rubinstein A. 1998. Games with procedurally rational players. Am. Econ. Rev. 88:834–49
    [Google Scholar]
  48. Pearl J. 2009. Causality: Models, Reasoning and Inference Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  49. Pearl J. 2014. Probabilistic Reasoning in Intelligent Systems: Networks of Plausible Inference San Francisco, CA: Morgan Kaufmann
    [Google Scholar]
  50. Pearl J, Mackenzie D. 2018. The Book of Why: The New Science of Cause and Effect New York: Basic Books
    [Google Scholar]
  51. Piccione M, Rubinstein A. 2003. Modeling the economic interaction of agents with diverse abilities to recognize equilibrium patterns. J. Eur. Econ. Assoc. 1:212–23
    [Google Scholar]
  52. Ross L. 1977. The intuitive psychologist and his shortcomings: distortions in the attribution process. Adv. Exp. Soc. Psychol. 10:173–220
    [Google Scholar]
  53. Samuelson W, Bazerman M. 1985. Negotiation under the winner's curse. Res. Exp. Econ. 3:105–38
    [Google Scholar]
  54. Sargent T. 1999. The Conquest of American Inflation Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  55. Sargent T, Wallace N. 1975. “Rational” expectations, the optimal monetary instrument, and the optimal money supply rule. J. Political Econ. 83:241–54
    [Google Scholar]
  56. Schumacher H, Thysen H. 2018. Equilibrium contracts and boundedly rational expectations Unpublished manuscript, KU Leuven Leuven, Belg.:
    [Google Scholar]
  57. Sloman S. 2005. Causal Models: How People Think About the World and Its Alternatives New York: Oxford Univ. Press
    [Google Scholar]
  58. Spiegler R. 2011. Bounded Rationality and Industrial Organization New York: Oxford Univ. Press
    [Google Scholar]
  59. Spiegler R. 2013. Placebo reforms. Am. Econ. Rev. 103:1490–506
    [Google Scholar]
  60. Spiegler R. 2016. Bayesian networks and boundedly rational expectations. Q. J. Econ. 131:1243–90
    [Google Scholar]
  61. Spiegler R. 2017. “Data monkeys”: a procedural model of extrapolation from partial statistics. Rev. Econ. Stud. 84:1818–41
    [Google Scholar]
  62. Spiegler R. 2019a. Can agents with causal misperceptions be systematically fooled. J. Eur. Econ. Assoc. 18:583617
    [Google Scholar]
  63. Spiegler R. 2019b. News and archival information in games Unpublished manuscript, Tel Aviv Univ., Tel Aviv Israel:
    [Google Scholar]
  64. Verma T, Pearl J. 1991. Equivalence and synthesis of causal models. Uncertain. Artif. Intell. 6:255–68
    [Google Scholar]
  65. Woodford M. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
/content/journals/10.1146/annurev-economics-072219-111921
Loading
/content/journals/10.1146/annurev-economics-072219-111921
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error