Assistant Professor of Economics
Department of Economics
London School of Economics
Curriculum Vitae (pdf)
Equilibrium Securitization with Diverse Beliefs, with M. Piccione and S. Zhang (2021). Forthcoming at Theoretical Economics. [slides]
We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders' diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders' disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.
Choice with Endogenous Categorization, with Y. Masatlioglu (2021). Forthcoming at the Review of Economic Studies. [slides]
Abstract. We propose and axiomatize the categorical thinking model (CTM) in which the framing of the decision problem affects how agents categorize alternatives, that in turn affects their evaluation of it. Prominent models of salience, status quo bias, loss-aversion, inequality aversion, and present bias all fit under the umbrella of CTM. This suggests categorization is an underlying mechanism of key departures from the neoclassical model of choice. We specialize CTM to provide a behavioral foundation for the salient thinking model of Bordalo et al. (2013) that highlights its strong predictions and distinctions from other models.
An older version, also with Yusufcan, that has some results more specific to Salient Thinking model: A Behavioral Foundations for Endogenous Salience
- On Dynamic Consistency in Ambiguous Games (2018). Games and Economic Behavior, 111:241-9. [slides]
Abstract. I consider static, incomplete information games where players may not be ambiguity neutral. Every player is one of a finite set of types, and each knows her own type but not that of the other players. Ex-ante, players differ only in their taste for outcomes. If every player is dynamically consistent with respect to her own information structure, respects consequentialism, and has at least two possible types, then the function representing beliefs must be additive on types.
Foundations for Optimal Inattention (2018). Journal of Economic Theory, 173:56-94. [slides]
Abstract. This paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information. The main result provides properties of the agent's conditional choices that are necessary and sufficient for the following as if interpretation: she chooses both her coarsening and her actions by constrained maximization of an underlying subjective expected utility preference relation. Observing these choices permits unique identification of the agent's utility index, cognitive constraint and prior (the last under a suitable richness condition). An application considers a market in which strategic firms offer differentiated products. If the consumer's information concerns firms' quality, then equilibrium consumer surplus may be higher with an optimally inattentive consumer than with one who processes all available information.
Correlation Misperception in Choice, with M. Piccione (2017). American Economic Review, 107(4):1264-92. [slides]
We present a decision-theoretic analysis of an agent's understanding of the
interdependencies in her choices. We provide the foundations for a simple and
flexible model that allows the misperception of correlated risks. We introduce
a framework in which the decision maker chooses a portfolio of assets among
which she may misperceive the joint returns, and present simple axioms
equivalent to a representation in which she attaches a probability to each
possible joint distribution over returns and then maximizes subjective
expected utility using her (possibly misspecified) beliefs.
An earlier version, "Complexity, Correlation, and Choice", with more results.
Condorcet Meets Ellsberg (2016). Theoretical Economics, 11(3):865-95. [slides]
The Condorcet Jury Theorem states that given subjective expected utility maximization and common values, the equilibrium probability that the correct candidate wins goes to one as the size of the electorate goes to infinity. This paper studies strategic voting when voters have pure common values but may be ambiguity averse -- exhibit Ellsberg-type behavior -- as modeled by maxmin expected utility preferences. It provides sufficient conditions so that the equilibrium probability of the correct candidate winning the election is bounded above by one half in at least one state. As a consequence, there is no equilibrium in which information aggregates.
An earlier version with Poisson population can be found here.
Subjective Causality in Choice, with H. C. Thysen.
An agent makes a stochastic choice from a set of lotteries. She infers the outcomes of her options using a subjective causal model represented by a directed acyclic graph, and consequently may misinterpret correlation as causation. Her choices affect her inferences which in turn affect her choices, so the two together must form a personal equilibrium. We show how an analyst can identify the agent's subjective causal model from her random choice rule. In addition, we provide necessary and sufficient conditions that allow an analyst to test whether the agent's behavior is compatible with the model.
Misspecified Higher-Order Beliefs and Failures of Social Learning, with M.R. Levy and B. Szentes [pdf coming soon].
We study a model of social learning with misspecified higher-order beliefs. The environment is such that with rational beliefs, players' actions would converge to the public information optimal action. A small misperception at an arbitrarily high level of the belief hierarchy may lead to predetermined learning: agents become arbitrarily convinced that a given state obtains, independently of the true state of the world.
Revealing Choice Bracketing, with D. Freeman.
Abstract. In a decision problem comprised of multiple choices, a person may fail to take into account the interdependencies between her choices. To understand how people make decisions in such problems, we design a novel experiment and revealed preference tests that determine how each subject brackets her choices. In separate portfolio allocation under risk, social allocation, and induced payoff function shopping experiments, we find that 40-43% of our subjects are consistent with narrow bracketing while only 0-15% are consistent with broad bracketing. Classifying subjects while adjusting for models' predictive precision, 74% of subjects are best described by narrow bracketing, 13% by broad bracketing, and 6% by intermediate cases.
Correlation Concern. [slides]
In many choice problems, the interaction between several distinct variables determines the payoff of each alternative. I propose and axiomatize a model of a decision maker who recognizes that she may not accurately perceive the correlation between these variables, and who takes this into account when making her decision. She chooses as if she calculates each alternative's expected outcome under multiple possible correlation structures, and then evaluates it according to the worst expected outcome.
- Advertising with Costly Attention [email me for a copy]
Abstract. This paper analyzes the implications of advertising in a model where consumers optimally allocate costly attention to information about match-specific firm quality. Consumers easily observe price but have a cost of processing information about quality, and advertisements decrease the marginal cost of acquiring this information. Firms choose both a price and an advertising level. An increase in advertising increases both own demand and total industry demand but has positive (respectively, negative) spillovers across firms with a low (respectively, high) aggregate level of advertising. In equilibrium, a small exogenous decrease in the cost of advertising has a positive impact on equilibrium advertising, demand, and price but ambiguous effects on equilibrium profit, welfare, and consumer surplus.