Deciphering the Noise: The Welfare Costs of Noisy Behavior

Aleksandr Alekseev, Glenn W. Harrison, Morten Lau, Don Ross

Research output: Working paperResearch

Abstract

Theoretical work on stochastic choice mainly focuses on the sources of choice ran- domness, and less on its economic consequences. We attempt to close this gap by developing a method of extracting information about the monetary costs of noise from structural estimates of preferences and choice randomness. Our method is based on allowing a degree of noise in choices in order to rationalize them by a given structural model. To illustrate the approach, we consider risky binary choices made by a sample of the general Danish population in an artefactual eld experiment. The estimated welfare costs are small in terms of everyday economic activity, but they are consider- able in terms of the actual stakes of the choice environment. Higher welfare costs are associated with higher age, lower education, and lower income.
Original languageEnglish
Place of PublicationAtlanta
PublisherCEAR, Georgia State University
Number of pages48
Publication statusPublished - Mar 2018
SeriesWorking paper / Center for Economic Analysis of Risk (CEAR)
Number2018-01

Keywords

  • Stochastic choice
  • Choice under risk
  • Welfare costs
  • Behavioral welfare economics

Cite this

Alekseev, A., Harrison, G. W., Lau, M., & Ross, D. (2018). Deciphering the Noise: The Welfare Costs of Noisy Behavior. Atlanta: CEAR, Georgia State University. Working paper / Center for Economic Analysis of Risk (CEAR), No. 2018-01