Experimental Economics Seminar - Thomas Graeber (Harvard Business School)

Title: Cognitive Uncertainty

Abstract: This paper shows theoretically and experimentally that cognitive uncertainty directionally predicts economic actions and beliefs. When people are cognitively uncertain about what the right action is, they implicitly compress objective probabilities towards a mental default of 50:50. By experimentally measuring cognitive uncertainty, this insight allows us to bring together and partially explain behavioral anomalies identified in choice under risk, choice under ambiguity, belief updating, and survey forecasts of economic variables. Through exogenous manipulations of both cognitive uncertainty and the location of the mental default, we provide causal evidence for the role of cognitive uncertainty, which we quantify through structural estimations.