Paper #1621

Title:

Cost-benefit analysis in reasoning

Authors:

Larbi Alaoui and Antonio Penta

Date:

October 2018

Abstract:

When an individual thinks about a problem, his decision to reason further may involve a tradeo between cognitive costs and a notion of value. But it is not obvious that this is always the case, and the value of reasoning is not well-dened. This pa- per analyzes the primitive properties of the reasoning process that must hold for the decision to stop thinking to be represented by a cost-benet analysis. We nd that the properties that characterize the cost-benet representation are weak and intuitive, suggesting that such a representation is justied for a large class of problems. We then provide additional properties that give more structure to the value of reasoning func- tion, including `value of information' and `maximum gain' representations. We show how our model applies to a variety of settings, including contexts involving sequential heuristics in choice, response time, reasoning in games and research. Our model can also be used to understand economically relevant patterns of behavior for which the cost-benet approach does not seem to hold. These include choking under pressure and (over)thinking aversion.

Keywords:

cognition and incentives, choice theory, reasoning, fact-free learning, sequential heuristics

JEL codes:

D01, D03, D80, D83.

Area of Research:

Microeconomics

Published in:

Journal of Political Economy, Volume 130, Number 4 April 2022

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