CeDEx Seminar - Erik Mohlin (Lund University)

Preferences as Heuristics

We present a theoretical model of how people’s preferences adapt to the incentives that prevail in their social environment. We start from the observation that the cognitive processes underlying belief-formation are imperfect and noisy. Hence, mistakes are unavoidable: an action that seems optimal may be suboptimal, especially if the differences in expected utility are small. Still, the relative probability of different costly mistakes can be adjusted by modifying subjective preferences. Developing a stronger preference for a particular action (or strategy) reduces the probability of not taking the action (or strategy) when it is optimal (i.e., a false negative), but it also increases the probability of taking the action when it is suboptimal (i.e., a false positive). The optimally adapted preferences strike a balance between these mistakes. The exact balance will depend on the environment, specifically which actions are typically optimal and how costly different mistakes are. Our theory can explain the existence of preferences for truthfulness, conditional cooperation, and compliance with social norms. More generally our framework suggests a link from differences in material and social environment to differences in preferences.