Information and the quality of decision making [electronic resource]

A central aim of microeconomic analysis is to understand what rules and institutions lead to outcomes that are, in some specific sense, good. Good outcomes obtain more easily if individuals make good decisions. This, in turn, requires that individuals adequately acquire and process information about the available choice options, and that they make appropriate use of this information. This dissertation explores how people demand and interpret information that is relevant for decision making, proposes a novel definition of what constitutes good decision making in the context of financial choices, and suggests avenues for policy making that may promote better decision making. The first chapter (co-authored with Shengwu Li) investigates how individuals value noisy information that guides economic decisions. In our laboratory experiment, we find that individuals underreact to increasing the informativeness of a signal, thus undervalue high-quality information, and that they disproportionately prefer information that may yield certainty. Both biases are entirely due to non-standard belief updating, rather than due to non-standard risk preferences. We find that individuals differ consistently in their responsiveness to information -- the extent that their beliefs move upon observing signals. Individual parameters of responsiveness to information have out-of-sample explanatory power in two distinct choice environments and are unrelated to proxies for mathematical aptitude. The remaining three chapters study how people demand and act on information within concrete markets and decision environments. The second chapter notes that much of economics assumes that higher incentives increase participation in a transaction only because they exceed more people's reservation price. It then shows theoretically and experimentally that when information about the consequences is costly, higher incentives also change reservation prices to further increase participation. A higher incentive makes people gather information in a way that is more favorable to participation---as if they were persuading themselves to participate. Hence, incentives change not only what people choose, but also what they believe their choices entail. This result informs the debate about laws around the world that severely restrict incentives for transactions such as organ donation, surrogate motherhood, human egg donation, and medical trial participation, based on the intuition that incentives may lead to bad decision making. It helps bridge a gap between economists on the one hand and the policy makers and ethicists on the other. The third chapter is co-authored with Vivienne Groves. We study unraveling in a two-sided, one-to-one matching market. The market operates over an extended period of time in which information about students arrives gradually. In equilibrium, hiring times are dispersed, as employers hire the most promising students as soon as the benefit from avoiding competition outweighs the informational loss associated with hiring early. There is no relation between employers' desirability and their hiring times. Both predictions are consistent with our data on the market for U.S. federal appellate court clerks. Our results and policy implications differ substantially from those in two-period models of unraveling, which dominate the literature. The fourth and final chapter is co-authored with Annamaria Lusardi and B. Douglas Bernheim. We introduce a method for measuring the quality of financial decision making built around a notion of financial competence, which gauges the alignment between individuals' choices and those they would make if they properly understood their opportunities. We use it to document the potential pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education. Motivational rhetoric can render the effects of such interventions indiscriminate even when people appear to understand and internalize the targeted concepts. Conventional methods of evaluation involving financial literacy, self-reported decision strategies, and directional effects on choices do not reliably detect these deficiencies.

Keywords: Economics.
Advisor: Bernheim B. Douglas primary advisor. Thesis advisor
Niederle Muriel primary advisor. Thesis advisor
Roth Alvin E.