Biases in prospective learning and dynamic choice

Many important economic decisions are made after individuals have had opportunities to acquire information.

For example, investors can do research about the fundamentals of companies to estimate their future stock prices; consumers can read reviews before making purchase decisions; managers can experiment with different organizational structures before settling on one.

As information acquisition is costly, decision-makers must evaluate its benefit ex ante by engaging in prospective learning, that is, by trying to predict the amount of information they will receive.PROSPECT aims to investigate experimentally whether individuals are able to correctly assess the benefits of future information acquisition, and to use this information proactively when making dynamic choices.

The main objective is to uncover some potential fundamental biases in dynamic decision-making, such as a tendency to acquire too little information and to under-experiment relative to the rational benchmark. In Part 1, I aim to identify biases in prospective learning.

The key question is whether individuals are able to correctly forecast the amount of information that a given real-life event reveals.

Part 1a will study finance professionals’ ability to prospectively learn from market prices, and Part 1b will investigate whether the general population is able to extract information from past economic events to better predict future economic events.Part 2 studies how individuals take prospective considerations into account when solving dynamic decision problems.

In Parts 2a and 2b, I will characterize whether they experiment as much as economic models predict they should, and study two candidate micro-foundations for insufficient experimentation.

Part 2c revisits an old idea in behavioral economics, according to which prospective thinking is key to achieving self-control.