Economic Choices and Cognitive Diversity
Find out about this project, which studies choices and rationality – a window to the human soul.
Choices are typically explained in economics by a single variable: preferences. The standard full rationality assumption posits that choice can be derived from maximising preferences. However, actual individuals are boundedly rational. They may not maximise anything. What is more, they are boundedly rational in different ways: they differ not only in their preferences but also in their cognitive make-up and in the mental procedures they use to arrive at their final decisions. Just as there is preference heterogeneity, so there is cognitive heterogeneity. Both determine population behaviour.
This dimension is completely missing in the standard model. It presents a world where a group of individuals with the same preferences all make the same choices. This seems untenable, since factors such as cognitive abilities, attention, susceptibility to the “framing” of the options, decision speed, and so on, differ hugely in the population.
In this Economic Choices and Cognitive Diversity project the researchers aim to introduce and analyse a unified theoretical framework to:
- accommodate cognitive-based (as well as preference-based) explanations of choices
- allow an observer of choices to infer both the underlying cognitive and preference variables.
The researchers will introduce in economics recent mathematical techniques that have proved useful in other disciplines.
The methodology is centered around developing a new way to (1) organise and (2) conceptualise choice data. The methodology will be developed by following two approaches: tensor decomposition and secondly, sparsity analysis.
Impact and outreach
Attributing choices solely to preferences has important drawbacks. If choosing option x over option y is an expression, say, of lack of attention rather than of preference, the standard model leads not only to misunderstanding the mechanism underlying what we observe, but also to formulating policies that are misguided. The significance of this project is that it addresses the very foundation of the way we model economic actions, and it extends well beyond the boundaries of economics, to areas as diverse as medical decision making, sustainability or intergenerational justice, as well as the more “obvious” ones of financial and industry regulation.
The aim of the project is to develop a unified formal theoretical framework to:
- accommodate a richer and more realistic psychology for human agents, in which cognition in addition to preferences is a fundamental driver of decision making
- allow an observer of choices to infer the distribution in a population of both underlying (and unobserved) sets of variables, cognitive and preference-related
- make theoretical choice models more capable of handling the new types of data that are nowadays copiously available.
The objective of the study is to lay the basis for a new standard approach that puts perceptual variables on the same footing as preferences. While the main contribution of the project will be at the theoretical level, the ultimate objective is for this new paradigm to be adopted in empirical work.
The project team brings together:
- Professor Marco Mariotti – Queen Mary, University of London
- Professor Paola Manzini – University of Sussex
The study is funded by The Leverhulme Trust and will run from 2020 until 2024.