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
“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
“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
“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
“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
“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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“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
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“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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“Rational Inattention and State Dependent Stochastic Choice” (with Andrew Caplin) - Latest Version March 2013
Economists are increasingly interested in how attention impacts behavior. Rational inattention theory models the allocation of attention in an optimizing framework. We characterize patterns of stochastic choice consistent with a general model of rational inattention, making no assumptions about attentional costs or constraints. We experimentally elicit "state dependent" stochastic choice data of the form required to test the model. Rational inattention theory does a qualitatively better job of matching this data than do random utility models that ignore the link between incentives and attention. Paper
“Allais, Ellsberg and Preferences for Hedging" (with Pietro Ortoleva) - Latest Version October 2012
We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel definition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to define a novel axiom that captures a preference for hedging which generalizes the one of Schmeidler (1989). We argue how this generalized axiom captures both aversion to ambiguity, and attraction towards certainty for objective lotteries. We show that this axiom, together with other standard ones, is equivalent to to two representations both of which generalize the MaxMin Expected Utility model of Gilboa and Schmeidler (1989). In both, the agent reacts to ambiguity using multiple priors, but does not use expected utility to evaluate objective lotteries. In our first representation, the agent treats objective lotteries as `ambiguous objects,' and use a set of priors to evaluate them. In the second, equivalent representation, lotteries are evaluated by distorting probabilities as in the Rank-Dependent Utility model, but using the worst from a set of such distortions. Finally, we show how a preference for hedging is not suffcient to guarantee an Ellsberg-like behavior if the agent violate expected utility for objective lotteries. We then provide an axiom that guarantees that this is the case, and find an
associated representation in which the agent rst maps acts to an objective lottery using the worst of the priors in a set; then evaluates this lottery using the worst distortion from a set of concave Rank-Dependent Utility functionals. Paper
“Estimating the Relationship between Economic Preferences: A Testing Ground for Unified Theories of Behavior” (with Pietro Ortoleva) - Latest Version August 2012
We consider 12 economic behaviors that have been identified by behavioral economists, measure them in a group of subjects, and estimate the empirical relationship. We find five factors that explain much of the variance in behavior, relating to: violations of expected utility (EU) in risky choice; ambiguity and compound lottery aversion; loss aversion and the endowment effect, time preferences and social preferences. Underlying this broad picture, we find many additional relationships: notably, ambiguity aversion is related to violations of EU in risky choice, the endowment effect, and loss aversion; risk aversion to discounting; and overconfidence (overplacement) to ambiguity aversion. Paper Appendix
“A Comment on “How Demanding is the Revealed Preference Approach to Demand?”” (with Daniel Martin) - Latest Version May 2012
Beatty and Crawford [2011] propose a measure of predictive success for the model of utility maximization which compares the proportion of households whose consumption choices satisfy the Generalized Axiom of Revealed Preference to the fraction of all possible choices from those budget sets that would satisfy GARP (the "target area"). This paper shows (1) using a target area based on empirically likely choices, rather than all possible choices, can lead to very different conclusions about the success of the standard model and (2) it is important to control for target area size when comparing the rationality of different demographic groups. Paper
“What Can Neuroeconomics Tell Us About Economic Decisions (and Vice Versa)?” - Latest Version Janurary 2012
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
“Testing for Rationality with Consumption Data: Demographics and Heterogeneity” (with Daniel Martin) - Latest Version June 2011
In this paper, 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. We use this method to answer three related questions: (i) "How close are individual consumption choices to satisfying the model of utility maximization?" (ii) "Are there differences in rationality between different demographic groups?" (iii) "Can choices be aggregated across individuals under the assumption of homogeneous preferences?" Crucially, in answering these questions, we take into account the power of budget sets faced by each household to expose failures of rationality. To summarize our results we find that: (i) while observed violations of rationality are small in absolute terms, our households are only moderately more rational than the benchmark of random choice; (ii) there are significant differences in the rationality of different groups, with multi-head households more rational than single head households, and the youngest households more rational than middle age households; (iii) the assumption of homogenous preferences is strongly rejected: choice data that is aggregated across households exhibits high levels of irrationality. 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
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