Mark Dean
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“Search and Satisficing” (with Andrew Caplin and Daniel Martin), American Economic Review, December 2011, 101 (7): 2899-2922

Many options are available even for everyday choices. In practice, most decisions are made without full examination of all such options, so that the best available option may be missed. We develop a search-theoretic choice experiment to study the impact of incomplete consideration on the quality of choices. We find that many decisions can be understood using the satisficing model of Simon [1955]: most subjects search sequentially, stopping when a “satisficing” level of reservation utility is realized. We find that reservation utilities and search order respond systematically to changes in the decision making environment. Paper

“Search, Choice and Revealed Preference (with Andrew Caplin), Theoretical Economics, January 2011, 6: 19-48

With complete information, choice of one option over another conveys preference. Yet when search is incomplete, this is not necessarily the case. It may instead reflect unawareness that a superior alternative was available. To separate these phenomena, we consider non-standard data on the evolution of provisional choices with contemplation time. We characterize precisely when the resulting data could have been generated by a general form of sequential search. We characterize also search that terminates based on a reservation utility stopping rule. We outline an experimental design that captures provisional choices in the pre-decision period. Paper

“Measuring Beliefs and Rewards: A Neuroeconomic Approach” (with Andrew Caplin, Paul Glimcher and
Robb Rutledge), Quarterly Journal of Economics, August 2010, 125(3): 923-960

The neurotransmitter dopamine is central to the emerging discipline of neuroeconomics; it is hypothesized to encode the difference between expected and realized rewards and thereby to mediate belief formation and choice. We develop the first formal test of this theory of dopaminergic function, based on a recent axiomatization by Caplin and Dean [2008A]. These tests are satisfied by neural activity in the nucleus accumbens, an area rich in dopamine receptors. We find evidence for separate positive and negative reward prediction error signals, suggesting that behavioral asymmetries in response to losses and gains may parallel asymmetries in nucleus accumbens activity. Paper

“Dopamine, Reward Prediction Error, and Economics” (with Andrew Caplin), Quarterly Journal of
Economics, May 2008 123(2): 663-701

The neurotransmitter dopamine has been found to play a crucial role in choice, learning, and belief formation. The best-developed current theory of dopaminergic function is the “reward prediction error” hypothesis—that dopamine encodes the difference between the experienced and predicted “reward” of an event. We provide axiomatic foundations for this hypothesis to help bridge the current conceptual gap between neuroscience and economics. Continued research in this area of overlap between social and natural science promises to overhaul our understanding of how beliefs and preferences are formed, how they evolve, and how they play out in the act of choice. Paper
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“A Game Theoretic Approach to Multimodal Communication” (with Alistair Wilson and James Higham), Behavioral Ecology and Sociobiology, Forthcoming

Over the last few decades the animal communication community has become increasingly aware that much communication occurs using multiple signals in multiple modalities. The majority of this work has been empirical, with less theoretical work on the advantages conferred by such communication. In the present paper we ask: Why should animals communicate with multiple signals in multiple modalities? To tackle this question we use game theoretic techniques, and highlight developments in the economic signaling literature that might offer insight into biological problems. We start by establishing a signaling game, and investigate signal honesty under two prevailing paradigms of honest communication - costly signaling and cheap talk. In both paradigms, without further constraint, it is simple to show that anything that can be achieved with multiple signals can be achieved with one.We go on to investigate different sets of possible constraints that may make multiple signals and multimodal signals in particular more likely to evolve. We suggest that constraints on cost functions and bandwidths, orthogonal noise across modalities, strategically distinct modes, multiple qualities, multiple signalers, and multiple audiences, all provide biologically plausible scenarios that theoretically favor multiple and multimodal signaling. Paper

“Testing the Reward Prediction Error Hypothesis with an Axiomatic Model” (with Robb Rutledge, Andrew Caplin and Paul Glimcher), Journal of Neuroscience, October 2010, 30(40):13525-1353

Neuroimaging studies typically identify neural activity correlated with the predictions of highly parameterized models, like the many reward prediction error (RPE) models used to study reinforcement learning. Identified brain areas might encode RPEs or alternatively simply have activity correlated with RPE model predictions. Here we use an alternate axiomatic approach rooted in economic theory to formally test the entire class of RPE models on neural data. We show that measurements of neural activity from the striatum, medial prefrontal cortex, amygdala, and posterior cingulate cortex satisfy necessary and sufficient conditions for the entire class of RPE models. However, activity measured from the anterior insula falsifies the axiomatic model and therefore no RPE model can account for this activity. Further analysis suggests the anterior insula might instead encode something related to the salience of an outcome. As cognitive neuroscience matures and models proliferate, formal approaches that assess entire classes of models rather than specific model exemplars may take on increased significance. Paper

“Axiomatic Methods, Dopamine and Reward Prediction Error” (with Andrew Caplin), Current Opinion in
Neurobiology, August 2008, 18(2): 197-202

The phasic firing rate of midbrain dopamine neurons has been shown to respond both to the receipt of rewarding stimuli, and the degree to which such stimuli are anticipated by the recipient. This has led to the hypothesis that these neurons encode reward prediction error (RPE)—the difference between how rewarding an event is, and how rewarding it was expected to be. However, the RPE model is one of a number of competing explanations for dopamine activity that have proved hard to disentangle, mainly because they are couched in terms of latent, or unobservable, variables. This article describes techniques for dealing with latent variables common in economics and decision theory, and reviews work that uses these techniques to provide simple, non-parametric tests of the RPE hypothesis, allowing clear differentiation between competing explanations. Paper

“Trading off Speed and Accuracy in Rapid, Goal-Directed Movements” (with Shih-Wei Woo and Laurence
Maloney), Journal of Vision, July 2007, 7(5): 1-12

Many studies have shown that humans face a trade-off between the speed and accuracy with which they can make movements. In this article, we asked whether humans choose movement time to maximize expected gain by taking into account their own speed–accuracy trade-off (SAT). We studied this question within the context of a rapid pointing task in which subjects received a reward for hitting a target on a monitor. The experimental design we used had two parts. First, we estimated individual trade-offs by motivating subjects to perform the pointing task under four different time constraints. Second, we tested whether subjects selected movement time optimally in an environment where they were rewarded for both speed and accuracy; the value of the target decreased linearly over time to zero. We ran two conditions in which the subjects faced different decay rates. Overall, the performance of 13 out of 16 subjects was indistinguishable from optimal. We concluded that in planning movements, humans take into account their own SAT to maximize expected gain. Paper
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“What Can Neuroeconomics Tell Us About Economic Decisions (and Vice Versa)?”, Chapter in Comparative Decision Making, Philip Crowley and Thomas Zentall, eds, 2013

Neuroeconomics, or the combination of neuroscience data with economic questions and modeling techniques, has been around for almost 10 years, yet many economists remain sceptical of its value for informing models of economic decision making. This article attempts to define what it is neuroeconomists are trying to do, as well as the explicit criticisms that have been leveled at the project from mainstream economists. I conclude that there is no in principle reason why neuroscience cannot help inform economic modeling, particularly through `inspiration' for new models, and by allowing process models to be tested piece by piece, rather than all at once. However, the fact that we have relatively few examples of either suggests that the project is not an easy one. Paper

“Enhanced Choice Experiments” (with Andrew Caplin), forthcoming in The Method of Modern Experimental Economics, Guillaume Frechette and Andrew Schotter, eds

We outline experiments that improve our understanding of decision making by analyzing behavior in the period of contemplation that preceeds commitment to a …nal choice. The experiments are based on axiomatic models of the decision making process that relate closely to revealed preference logic. To test the models, we arti…cially incentivize particular choices to be made in the pre-decision period. We show how the resulting experiments can improve our understanding not only of the decision making process, but of the decision itself. Our broad method is to make aspects of search visible while retaining the disciplined approach to data that axiomatic modeling best provides. Paper

“Economic Insights from ‘Neuroeconomic’ Data” (with Andrew Caplin), American Economic Review Papers and Proceedings, May 2008, 98(2): 169-174

No Abstract Paper

“Axiomatic Neuroeconomics” (with Andrew Caplin), Chapter in Neuroeconomics: Decision Making and the Brain, Paul Glimcher, Colin Camerer, Ernst Fehr and Russell Poldrack, eds, 2008

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“The Neuroeconomic Theory of Learning” (with Andrew Caplin), American Economic Review Papers and Proceedings, May 2007, 97(2): 148-152

No Abstract Paper

“Why has World Trade Grown Faster than World GDP?” (with Maria Sebastia-Barriel), Bank of England Quarterly Bulletin, Autumn 2004: 310-320

Between 1980 and 2002, world trade has more than tripled while world output has "only" doubled. The rise in trade relative to output is common across countries and regions, although the relative growth in trade and output varies greatly. This article attempts to explain why the ratio of world trade to output has increased over recent decades. It provides a brief review of the key determinants of trade growth and identifies proxies that will enable us to quantify the relative importance of the different channels. We estimate this across a panel of ten developed countries. This will allow us to understand better the path of world trade and thus the demand for UK exports. Furthermore this approach will help us to distinguish between long-run trends in trade growth and cyclical movements around it. Paper
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“Credit Constraints and the Measurement of Time Preferences” (with Anja Sautmann) - Latest Version March 2014

Abstract Incentivized experiments are commonly used to estimate marginal rates of intertemporal substitution (MRS) in the lab and in the field in order to make inferences about individual time preferences. This paper considers an integrated model of behavior in which individuals are subject to financial shocks and credit constraints, and take those into account when making experimental choices. The model shows that measured MRS depends on the individual's effective interest rate which is equal to the relative marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject's financial situation, like savings and shocks to income and consumption. We test the model using a new a panel data set from Mali and find evidence for such effects. Our results imply that the relationship between experimentally elicited MRS and time preferences is not straightforward. However, measured MRS can be useful in determining the importance of different types of financial shocks to the household. Paper

“The Behavioral Implications of Rational Inattention with Shannon Entropy” (with Andrew Caplin) - Latest Version August 2013

Th e model of rational inattention with Shannon mutual information costs is increasingly ubiquitous. We introduce a new solution method that lays bare the general behavioral properties of this model and liberates development of alternative models. We experimentally test a key behavioral property characterizing the elasticity of choice mistakes with respect to attentional incentives. We find that subjects are less responsive to such changes than the model implies. We introduce generalized entropy cost functions that better match this feature of the data and that retain key simplifying features of the Shannon model. Paper Supplemental Materiel

“Revealed Preference, Rational Inattention, and Costly Information Acquisition” (with Andrew Caplin) - Latest Version January 2014

We develop a revealed preference test for optimal acquisition of costly information. The test encompasses models of rational inattention, sequential signal processing, and search. We provide limits on the extent to which attention costs can be recovered from choice data. We experimentally elicit state dependent stochastic choice data of the form the tests require. In simple cases, tests confirm that subjects adjust their attention in response to incentives as the theory dictates. Paper Supplemental Materiel

“Measuring Rationality with the Minimum Cost of Revealed Preference Violations" (with Daniel Martin) - Latest Version December 2013

We introduce a new measure of how close a set of choices are to satisfying the observable implications of rational choice and apply it to a large balanced panel of household level consumption data. This new measure, the Minimum Cost Index, is the minimum cost of breaking all revealed preference cycles found in choices from budget sets. Using this measure we find that while observed violations of rationality are small in absolute terms, households are only moderately more rational than a benchmark of random choice. However, we find significant differences in the rationality of different demographic groups, with larger and older households closer to rationality. Surprisingly, households with more than one household head are also significantly more rational. In contrast to previous work, we document differences between demographic groups while controlling for predictive power. Paper Supplemental Materiel

“Allais, Ellsberg and Preferences for Hedging" (with Pietro Ortoleva) - Latest Version May 2014

Two of the most well-known regularities of preferences under risk and uncertainty are ambiguity aversion and the Allais paradox. We study the behavior of an agent who can display both tendencies at the same time. We introduce a novel notion of preference for hedging that applies to both objective lotteries and uncertain acts. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent evaluates ambiguity using multiple priors, like in the model of Gilboa and Schmeidler [1989], but does not use Expected Utility to evaluate objective lotteries. Rather, lotteries are evaluated by distorting probabilities as in the Rank Dependent Utility model, but using the worst from a set of distortions. We show that a preference for hedging is not sufficient to guarantee an Ellsberg-like behavior if the agent violates Expected Utility for objective lotteries, and we provide a novel axiom that characterizes the special case of our representation that guarantees ambiguity aversion, linking the distortions for objective and subjective bets. Finally, we show that our representation is equivalent to one in which the agent treats objective lotteries as `ambiguous objects,' and uses a set of priors to evaluate them. Paper

“Is it All Connected? A Testing Ground for Unified Theories of Behavioral Economics Phenomena” (with Pietro Ortoleva) - Latest Version March 2014

Abstract We estimate 11 well-studied behavioral phenomena in a group of 190 laboratory subjects (short-term discount rates, small stakes risk aversion, present bias, loss aversion, the endowment effect, aversion to ambiguity and compound lotteries, the common ratio and common consequence effects and sender/receiver behavior in trust games). We study the joint distribution of these behaviors and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between loss aversion and the endowment effect, and between probability weighting (as measured by the common ratio and common consequence effects) and risk aversion, in line with Cumulative Prospect Theory (CPT). We also find risk aversion to be related to ambiguity aversion, compound lottery aversion and discounting, consistent with the curvature of the utility function being an important determinant of all three behaviors. However, we do not find evidence that probability weighting in the risk domain is related to ambiguity and compound lottery aversion or present bias (as implied by recent extensions to CPT). Behavior in the trust game is unrelated to risk or uncertainty attitudes. We find little relation between intelligence or personality measures and economic behavior, although we do find overconfidence to be negatively related to many behaviors (particularly ambiguity aversion) and women to be much more loss averse than men. Paper

“Status Quo Bias in Large and Small Choice Sets” - Latest Version November 2008

This paper introduces models of status quo bias based on the concept of decision avoidance, by which a decision maker may select the status quo in order to avoid a difficult decision. These models capture the experimental finding that the status quo is more frequently chosen in larger choice sets. This phenomenon violates the predictions of current preference-based models of status quo bias that assume a decision maker with a fixed status quo will make consistent choices. Using laboratory experiments, I show that subjects in large choice sets do exhibit behavior in line with decision avoidance, while in small choice sets, preference-based models offer a better explanation of behavior. These findings raise questions for advocated policies of “benign paternalism.” Paper
Department of Economics

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mark_dean@brown.edu

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