Separating Preferences from Endogenous Effort and Cognitive Noise in Observed Decisions

Christian Belzil () and Tomáš Jagelka ()
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Christian Belzil: CREST, CNRS, Paris Polytechnic Institute, IZA, CIRANO
Tomáš Jagelka: University of Bonn, Dartmouth College, CREST-Ensae, IZA

No 350, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We develop a micro-founded framework for accounting for individuals' effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice.

Keywords: Preferences; risk preference; stochastic choice models; endogenous effort; cognitive noise; task complexity; experimental design (search for similar items in EconPapers)
JEL-codes: C40 D91 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2024-12
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:350

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