Working Paper: CEPR ID: DP3603
Authors: Isabelle Brocas; Juan D. Carrillo
Abstract: This Paper studies a model where individuals have imperfect self-knowledge and learning is costly. It shows that the endogenous decision to collect information before taking an action creates a systematic and testable bias in the aggregate behaviour of agents in the economy. More precisely, individuals distort the information acquisition procedure so as to favour the possibility of undertaking the action that generates the highest benefits in some states, even if it also generates the biggest losses in some others. The Paper thus explains within a rational framework why 80% of individuals may perceive themselves as being brighter, better drivers and more able entrepreneurs than their average peer. Applications to biases in career choices and judicial decisions are discussed.
Keywords: bias in judgement; decision-making; self-perception
JEL Codes: A12; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision to acquire information (D80) | systematic biases in behavior (D91) |
| imperfect self-knowledge (D80) | favoring information that leads to high-reward actions (D91) |
| favoring information that leads to high-reward actions (D91) | higher prevalence of individuals perceiving themselves as above average (C12) |
| costs associated with acquiring accurate self-knowledge (D80) | tendency to misjudge one's abilities (D80) |
| tendency to misjudge one's abilities (D80) | influence on career choices and judicial decisions (K40) |