Abstract:
We report the results of over 30 experiments to study the elasticity of economic decisions with respect to fundamentals. Our experiments cover a broad range of domains, from choice and valuation to belief formation, from strategic games to generic optimization problems, involving investment, savings, effort supply, product demand, taxes, externalities, fairness, beauty contests, search, policy evaluation, forecasting and inference. We identify two general patterns. First, behavioral attenuation: in 93% of our experiments, the elasticity of decisions to variation in fundamentals decreases in subjects' cognitive uncertainty about their best decision. Second, diminishing sensitivity: the elasticity of decisions decreases in the distance of the fundamental from 'simple points' at which the best decision is transparent, and this decrease in elasticities is again mirrored by an increase in cognitive uncertainty. These results suggest that cognitive uncertainty systematically predicts an attenuation of economic elasticities, and that there is less (or no) uncertainty and attenuation when problems are cognitively easy. We argue that attenuation links several known decision anomalies, and study its limits.
