Events at CERGE-EI

Cosmin Ilut, Ph.D.

Duke University, Durham, North Carolina, USA

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Authors: Cosmin Ilut and Rosen Valchev

Abstract: We develop a tractable model of limited cognitive perception of the optimal policy function. Agents allocate cognitively costly reasoning effort to generate signals about the optimal action conditional on the observed objective state. Accumulated signals update beliefs about the entire function, but mostly about the optimal action conditional on states close to the realizations where reasoning occurred. Agents reason more when observing unusual states, producing state- and history-dependent responses akin to salient thinking. The typical individual and aggregate actions exhibit non-linearity, endogenous persistence and volatility clustering. Individual behavior also displays stochastic choice, biases in systematic behavior, and cross-sectional volatility clusters.
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Full Text: “Economic Agents as Imperfect Problem Solvers”