JOB MARKET PAPER
Extended abstract appears in EC'21
Abstract: In this paper, we study two heuristics, narrow bracketing and correlation neglect, that decision makers adopt to simplify the evaluation of risk from multiple sources and axiomatize them as behavioral deviations from the expected utility benchmark by relaxing the independence axiom. Our axiomatization reveals decision rules that (i) allow for narrow bracketing or correlation neglect or both and (ii) allow for different levels of narrow bracketing. We interpret the different sources as different streams of income to explain experimental evidence on violations of first order stochastic dominance. We propose a rationality ranking of decision makers based on their tendency to violate first order stochastic dominance and rank our models accordingly. Then, we interpret one source as background risk and show that narrow bracketing can explain risk aversion over small gambles. Finally, we interpret the different sources as consumption in different periods to explore the implications of narrow bracketing and correlation neglect on the optimal saving behavior. We also show that an Epstein-Zin type utility function can emerge because of narrow bracketing. This new utility function achieves separation between time and risk preferences without inducing an implausibly high early resolution premium as observed by Epstein, Farhi, and Strzalecki (2014).
Abstract: In this paper, we study two heuristics, narrow bracketing and correlation neglect, that decision makers adopt to simplify the evaluation of risk from multiple sources and axiomatize them as behavioral deviations from the expected utility benchmark by relaxing the independence axiom. Our axiomatization reveals decision rules that (i) allow for narrow bracketing or correlation neglect or both and (ii) allow for different levels of narrow bracketing. We interpret the different sources as different streams of income to explain experimental evidence on violations of first order stochastic dominance. We propose a rationality ranking of decision makers based on their tendency to violate first order stochastic dominance and rank our models accordingly. Then, we interpret one source as background risk and show that narrow bracketing can explain risk aversion over small gambles. Finally, we interpret the different sources as consumption in different periods to explore the implications of narrow bracketing and correlation neglect on the optimal saving behavior. We also show that an Epstein-Zin type utility function can emerge because of narrow bracketing. This new utility function achieves separation between time and risk preferences without inducing an implausibly high early resolution premium as observed by Epstein, Farhi, and Strzalecki (2014).
PUBLICATIONS
Abstract: This paper studies the implementation problem of a mechanism designer with ambiguity averse agents. The mechanism designer, desiring to implement a choice correspondence, can create ambiguity for agents by committing to multiple allocation rules and transfer schemes without revealing which one to use. By extending the cyclical monotonicity condition from choice functions to choice correspondences, we show that the condition can fully characterize implementable choice correspondences. We then study the implementability of choice correspondences in supermodular environments. As an application, we consider a mechanism designer who wants to allocate one object to one of her most desired agents and show that she can strictly benefit from concealing the tie-breaking rules. An intuitive and computationally tractable condition is provided to characterize when the mechanism designer's preference induces an implementable choice correspondence.
A Robust Reference-dependent Model for Rational Speculative Bubbles (with Jie Zheng) Journal of Economic Behavior & Organization, 137: 232-258, 2017.
Abstract: We present a robust model of speculative bubbles by introducing loss-averse reference-dependent preferences by Kőszegi and Rabin (2006) into the framework of Allen et al. (1993), where in equilibrium, asymmetrically-informed rational investors buy overvalued assets, hoping to sell them to less informed agents before the crash occurs. With reference-dependent preferences, the asset price may not necessarily be observable to agents when there is no trade. However, this is never the case with classical preferences, as shown in the paper. Incorporating the classical model as a special case, we generalize the notion of bubbles to allow for the analysis in the case of a silent market with unobservable prices, and our model is able to generate strong bubbles robust to moderate perturbations in parameters without the need for stronger conditions as suggested in previous literature. Assuming for simplicity that dividends can only take on two values, we construct an example of a robust reference-dependent bubble which is not robust in the classical setting, and we also show that the positive results regarding the limit of the bubble size and bubble frequency in the classical setting are preserved in our framework. Our main results and economic implications remain valid in more general settings.
WORKING PAPERS
Abstract: We model a decision maker who anticipates her preference to change in the future and optimistically evaluates each menu according to the best choice that could possibly be made by her future self. We characterize this menu preference, discuss the uniqueness of our representation and propose a comparative measure of optimism. We apply our model to three behavioral biases: naivete about present bias, projection bias and the disjunction effect.
(Previous title: Optimistic Dynamic Inconsistency)
(Previous title: Optimistic Dynamic Inconsistency)
Abstract: We establish the existence of Walrasian equilibrium for economies with many discrete goods and possibly one divisible good. Our goal is not only to study Walrasian equilibria in new settings but also to facilitate the use of market mechanisms in resource allocation problems such as school choice or course selection. We consider all economies with quasilinear gross substitutes preferences but allow agents to have limited quantities of the divisible good (limited transfers economies). We also consider economies without a divisible good (nontransferable utility economies). We show the existence and efficiency of Walrasian equilibrium in limited transfers economies and the existence and efficiency of strong (Walrasian) equilibrium in nontransferable utility economies. Finally, we show that various constraints on minimum and maximum levels of consumption and aggregate constraints of the kind that are relevant for school choice/course selection problems can be accommodated by either incorporating these constraints into individual preferences or by incorporating a suitable production technology into nontransferable utility economies.
(This version: June 2020. An updated version coming soon.)
(This version: June 2020. An updated version coming soon.)
Abstract: We study asymptotic learning when the decision maker is ambiguous about the precision of her information sources. She aims to estimate a state and evaluates outcomes according to the worst case scenario. Under prior-by-prior updating, ambiguity regarding information sources induces ambiguity about the state. We show that this induced ambiguity does not vanish even as the number of information sources grows indefinitely, and characterize the limit set of posteriors. The decision maker's asymptotic estimate of the state is generically incorrect. We consider several applications. Among them, (i) we provide a foundation for disagreement among agents with access to the same large dataset; (ii) we show that a small amount of ambiguity can exacerbate the effect of model misspecification on learning; and (iii) we analyze a setting in which the decision maker learns from observing others' actions.
(Online Appendix; Previous title: Information Aggregation under Ambiguity)
(Online Appendix; Previous title: Information Aggregation under Ambiguity)
Selected WORK in progress
Abstract: Besides limited memory (i.e., forgetting), a decision maker might have biased memory. For instance, her memory might be cursed in the sense of Eyster and Rabin (2005) and undervalue the informational content of her previous actions. She might also suffer from the choice-supportive bias and tend to overly justify her previous choices. We study the effects of such memory biases on optimal learning in a simple Wald problem. We show that compared to limited memory, biased memory can lead to more risk-taking and overconfidence. In an application to Bayesian persuasion, we show that, although the concavification result continues to hold if the receiver's memory is only limited, it fails if her memory is biased. In this case, the sender can strictly benefit from dynamic persuasion.
Abstract: Evaluating and comparing the difficulty of problems are playing an important role in decision making. In this paper, we define and axiomatize the preference for simplicity as a subjective measure for simplicity of problems and introduce the concept of difficulty levels as endogenous outcomes. A prior and an induced preference over finite lotteries of natural numbers characterize the the preference for simplicity. The decision maker transforms each problem into a prospect of difficulty levels and then rank prospects according to the induced preference over lotteries. We then characterize the the preference for simplicity with more structures like the mixture continuous utility representation and the bounded expected utility representation. We also define the comparison of accuracy and variation aversion for the preference for simplicity and relate our models to existing models on ambiguity.
(Old version in December 2018)
(Old version in December 2018)