Inattention, Information Provision, and (Failures of) Revealed Preference,

Abstract

Economists often estimate preferences by looking at how demand for an option changes as its attributes change or as beliefs about them change in response to information. I show in a multi-attribute induced-preference experiment that this method can be substantially biased due to differential inattention. Attention is systematically distorted at baseline, with participants reacting much more to some attributes than others. Further, attention is highly malleable: information telling participants about the value of a desirable attribute—even when the information is already known, transparently redundant, and explicitly randomly assigned—greatly increases attention to the attribute it describes and distracts from other attributes. It also boosts average demand for the good, implying that inattention takes the form of neglect rather than shrinkage toward a prior. These results combine to imply that information experiments with passive control groups can be greatly misleading about preferences and can even have the wrong sign: in my experiment, reducing overoptimism about an attribute nonetheless boosts demand for its associated good. I show, both theoretically and experimentally, that active control-group experiments yield preference estimates with the correct sign but biased magnitudes. Finally I show that parallel active control-group experiments (PACEs) can solve this problem: PACEs yield unbiased estimates of preferences under an equal induced-attention assumption, which is testable (and satisfied) in my experiment.