Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/335963 
Year of Publication: 
2025
Series/Report no.: 
IZA Discussion Papers No. 18315
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We develop a micro-founded framework to account for individuals' effort and cognitive noise which confound estimates of preferences based on observed behavior. Using a large-scale experimental dataset we find that observed decision noise responds to the costs and benefits of exerting effort on individual choice tasks as predicted by our model. We estimate that failure to properly account for decision errors due to (rational) inattention on a more complex, but commonly used, task design biases estimates of risk aversion by 50% for the median individual. Effort propensities recovered from preference elicitation tasks generalize to other settings and predict performance on an OECD-sponsored achievement test used to make international comparisons. Furthermore, accounting for endogenous effort allows us to empirically reconcile competing models of discrete choice.
Subjects: 
economic preferences
latent attributes
stochastic choice models
endogenous effort
cognitive noise
complexity
experimental design
achievement tests
JEL: 
D91
C40
Document Type: 
Working Paper

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