Collaborative Research: Payoff-Belief Separable Preferences

Purdue University, West Lafayette IN

Investigators

Abstract

This project builds a bridge between the frontier of behavioral economics and mainstream applied economic analysis. The team analyzes and tests a model of individual economic decisions. In this model, the beliefs of consumers, workers, and investors directly impact their individual well-being. The research builds a unifying framework that includes many widely used models from behavioral economics as specific cases. The team develops testable implications that can be used to determine whether the models accurately describe individual behavior. They will use these to test the new theory in a series of laboratory experiments. The model they propose is an alternative to the standard model of utility maximization that is almost universally used when economic science is applied to understand or predict economic outcomes. As a result, the new theory could bring frontier insights from psychology, decision science, and behavior economics to wide adoption in mainstream economic analysis. This kind of analysis is widely used by state and local governments, the US federal government, and business. As a result, the project could improve economic policies and the ability of businesses to compete in the marketplace. The project uses decision theory to enrich the study of preferences that depend both on material outcomes and intermediate beliefs. The team introduces and analyzes a new class of dynamic preferences to capture a general additively-separable approach to belief-based utility. This class encompasses many models already developed in behavioral economics. Models of belief-based utility have demonstrated important implications for the design of medical tests, the analysis of how investors rebalance portfolios, and other important applications. Providing new, simple, and testable conditions to distinguish between different belief-based motivations for economic decisions will help us to better understand how psychological processes affect economic decisions. 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.