Choice-induced Misspecified Mental Models 

Abstract

I design an experiment to document and understand misspecified mental models with an illusion of control, i.e., false beliefs in causal impacts of controllable factors on payoff-relevant outcomes. Participants learn from observational data and then manipulate a randomly assigned variable — their choice variable — to potentially affect a payoff-relevant outcome. I directly elicit participants’ mental models about the outcome-generating process and find that their models tend to involve the choice variable, implying an illusion of control when this variable is completely irrelevant. I show that the experience of making choices directly distorts mental models, and provide suggestive evidence that memory plays a mediating role: The choice process causes individuals to selectively retrieve the memory information on the association between their choice variable and the outcome. 

Keywords: Belief distortions, misspecified models, illusion of control, memory retrieval

JEL Classification: C91, D83, D91