Biased Beliefs and Social Interactions

Yale University, New Haven CT

Investigators

Abstract

This award funds research in economic theory that examines the determinants and implications of biased perceptions and beliefs. There are three components to this proposal. The first two study biased perceptions in the context of social interactions. The team is especially interested in understanding what kinds of misperceptions about society are likely to arise when people interact with only a non-representative sample of the population, and how such misperceptions affect people's ability to learn from their social contacts. The third component focuses on a type of bias that may affect individual decision making, called belief distortion. The research will give us new tools to understand and predict the outcomes of social interactions and decision-making under uncertainty. These are key to understanding many economic decisions. As a result, the project may eventually give us better ways to predict the effects of economic policies designed to promote the national interest. The first project in the proposal builds and analyzes a model of local interaction games with coordination motives. The goal is to understand what forms of misperceptions about population characteristics and social interaction patterns can arise, and how these misperceptions affect behavior and economic welfare. The second project studies how individuals' misperceptions about their societies affect social learning about unknown fundamentals. One surprising prediction is that even under arbitrarily small amounts of misperception, information aggregation may break down completely. The third project develops an axiomatic model of belief distortion. The aim is to provide a unified framework to understand central examples of belief distortion, such as ambiguity aversion and regret, that have been widely observed. The team also wants to use this new framework to analyze the behavioral implications of additional phenomena such as motivated cognition that thus far are not well understood in terms of choice theory. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.