Revealed preferences over experts and quacks and failures of contingent reasoning

Yan Xu

Publications: Working paper

Abstract

In many economic scenarios, people face incomplete information about the payoffrelevant states of the world, and they may resort to different tests (e.g., analysts, medical diagnoses, or psychic octopuses) to obtain information to reduce their risk exposure. This chapter studies how people evaluate and choose tests. Are they able to
avoid useless ones (quacks) and identify genuinely useful ones (experts)? Are they
over-paying for quacks and under-paying for experts, and why? I develop a novel
experiment wherein people face a rich and structured choice set of expert and quack
tests and choose their favorite ones through a graphic coloring task. I find that people
do fail to distinguish experts and quacks on a large scale, and they are over-paying
for quacks but accurately paying for experts. These results are not driven by the standard explanations suggested in the literature, including belief updating bias, failure in
best-responding, and intrinsic preference over certain information characteristics. Instead, I show that the main culprit is the failure of contingent reasoning in information
processing. That is, people cannot correctly foresee how expert and quack tests influence their decision problems for all contingencies provided by signals. The failure of
contingent reasoning underlies many decision problems in behavioral economics and
game theory, and this paper provides new implications for these fields.
Original languageEnglish
Publication statusIn preparation - 2020

Austrian Fields of Science 2012

  • 502045 Behavioural economics
  • 502057 Experimental economics

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