Steering Fallible ConsumersAbstract:
A kind of steering occurs when an intermediary (e.g., a social network provider) suggests, or otherwise directs a consumer's attention toward, products she is more likely to purchase. We analyze the implications of this practice for the consumer's welfare when she might purchase by mistake, distinguishing between preference-based steering (that based on the consumer's true values), mistake-based steering (that based on the consumer's mistakes), and perceived-value-based steering (that based on the consumer's perceived values). In a benchmark with no mistakes, steering always increases consumer welfare. With mistakes, the welfare effect is often negative, and depends on (1) the type of steering, (2) the "selectivity" of the intermediary in identifying products the consumer is more likely to purchase, and (3) the "reasonability" -- a relaxation of full rationality -- of the consumer in buying and refraining from buying. A sufficient condition for preference-based and perceived-value-based, a necessary condition for mistake-based, and a necessary and sufficient condition for very non-selective preference-based and mistake-based as well as relatively non-selective perceived-value-based steering to be beneficial is that the consumer buys reasonably. A necessary and sufficient condition for very selective mistake-based, and a sufficient condition for any kind of steering to be beneficial is that the consumer does not refrain reasonably.
Joint with Paul Heidhues and Mats Köster. Updated September 2020.
Overconfidence and PrejudiceAbstract:
By injecting a single non-classical assumption, overconfidence, into a bare-bones model of how an agent learns from social observations, we explain key stylized facts about social beliefs and factors that influence them, and make additional novel predictions. First, the agent has self-centered views about discrimination: he believes in discrimination against any group he is in more than an outsider does. Second, the agent is subject to in-group bias: the greater is his "index of similarity" with an individual, the more positively he evaluates the individual. Third, these biases are increasing in the agent's overconfidence. Fourth, the biases are sensitive to how he divides society into groups when evaluating outcomes, so changing his way of thinking on this matter can lower his biases. Fifth, however, only specific types of information are helpful in debiasing the agent; e.g., giving him more accurate information about himself increases all his biases, and better information about someone else helps only if it is direct personal information about the individual's quality. Sixth, the agent is prone to "bias substitution," implying that the introduction of a new competitor group leads him to develop a negative opinion of the new group but positive opinions of other groups. Due to its unique blend of predictions, the model is consistent with much evidence invoked for either the statistical or the taste-based theory of discrimination against the other. Methodologically, our analysis is made possible by a novel explicit characterization of long-run beliefs in general high-dimensional misspecified learning models with normal exogenous signals.
Joint with Paul Heidhues and Philipp Strack. Updated June 2020.
We develop a model of fragile self-esteem — self-esteem that is vulnerable to objectively unjustified swings — and study its implications for choices that depend on, or are aimed to protect, one's self-view. We assume that a person's self-esteem is determined by sampling from his store of ego-relevant memories in a fashion that in turn depends on his self-esteem. This feedback mechanism can create multiple "self-esteem personal equilibria," making self-esteem fragile. Self-esteem is especially likely to be fragile, as well as unrealistic in either the positive or the negative direction, if it is an important ingredient of overall utility. A person with fragile self-esteem who has a low self-view might respond to an increase in incentives by decreasing effort. An individual with a high self-view, in contrast, might distort their choices to avoid a collapse in self-esteem. We discuss the implications of our results for education, job search, workaholism, and aggression.
Joint with George Loewenstein and Takeshi Murooka. Updated November 2019.
Financial Choice and Financial InformationAbstract:
We analyze the implications of increases in the selection of, and information about, derivative financial products in a model in which investors neglect informational differences between themselves and issuers. We assume that investors receive information that is noisy and inferior to issuers' information, and that issuers can select the set of underlying assets when designing a security. In contrast to the received wisdom that diversification is helpful, we show that when custom-designed diversification across a large number of underlying assets is possible, then expected utility approaches negative infinity. Even beyond this limiting case, any expansion in choice induced by either an increase in the maximum number of assets underlying a security, or an increase in the number of assets from which the underlying can be selected, Pareto-lowers welfare. Furthermore, under reasonable conditions an improvement in investor information Pareto-lowers welfare by giving investors the false impression that they can spot good deals. An increase in competition between issuers does not increase welfare, and even increases investors' incentive to acquire welfare-reducing information. Restricting the set of underlying assets the issuer can use -- a kind of standardization -- raises welfare, and once this policy is adopted, increasing investor information becomes beneficial.
Joint with Péter Kondor. Updated May 2017.