Economic Theory - Juan Carlos Carbajal (UNSW)

Title: Information and Causal Misperceptions: Escaping Personal Equilibrium Effects
Abstract: Following the work of Spiegler (2016), we use Bayesian networks to model a decision maker (DM) who is boundedly rational in the sense of having a misspecified causal model. Spiegler (2016) shows that such misspecification could lead to personal equilibrium effects: the DM may calculate conditional probabilities of the relevant state variables incorrectly, and the DM’s action may influence her interpretation of the underlying data in ways that exacerbate this issue. Our first result provides an ex- act characterization of when personal equilibrium effects do arise. This characterization is formulated in terms of structural independence assertions of the DM’s misspecified Bayesian network structure. We then investigate whether personal equilibrium effects can be mitigated by providing the DM with additional information.