Rational Ignoring with Unbounded Cognitive Capacity
Journal of Economic Psychology, Vol. 29, No. 6, pp. 792-809, 2008
20 Pages Posted: 15 Oct 2010
Date Written: 2008
Abstract
In canonical decision problems with standard assumptions, we demonstrate that inversely related payoffs and probabilities can produce expected-payoff-maximizing decisions that are independent of payoff-relevant information. This phenomenon of rational ignoring, where expected-payoff maximizers ignore costless and genuinely predictive information, arises because the conditioning effects of such signals disappear on average (i.e., under the expectations operator) even though they exert non-trivial effects on payoffs and probabilities considered in isolation (i.e., before integrating). Thus, rational ignoring requires no decision costs, cognitive constraints, or other forms of bounded rationality. This implies that simple decision rules relying on small subsets of the available information can, depending on the environment in which they are used, achieve high payoffs. Ignoring information is therefore rationalizable solely as a consequence of the shape of the stochastic payoff distribution.
Keywords: Ignoring, Value of information, Heuristic, Bounded rationality, Ecological rationality
JEL Classification: D60, D83, D11
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Normative Behavioral Economics
By Nathan Berg
-
Does Society Benefit from Investor Overconfidence in the Ability of Financial Market Experts?
By Nathan Berg and Donald D. Lien
-
As-If Behavioral Economics: Neoclassical Economics in Disguise?
By Nathan Berg and Gerd Gigerenzer
-
Psychology Implies Paternalism? Bounded Rationality May Reduce the Rationale to Regulate Risk-Taking
By Nathan Berg and Gerd Gigerenzer
-
Evolutionary Rationality, 'Homo Economicus', and the Foundations of Social Order
-
Inconsistency Pays?: Time-Inconsistent Subjects and EU Violators Earn More
By Nathan Berg, Catherine C. Eckel, ...
-
By Nathan Berg