Abstract

We investigate how increasing the complexity of the message space, in the presence of limited memory, can reduce misrepresentation in strategic communication. We enrich a standard cheap talk game so that senders must communicate not just a payoff-relevant state, but also payoff-irrelevant attributes correlated with the state.  We show that: (i) increasing the set of attributes that may need to be reported (i.e., the complexity of the game) improves the amount of information transmitted in equilibrium, (ii) too much of an increase in complexity leads to a reversal of those gains, (iii) limited memory on the part of players, as well as the relative complexity faced by senders and receivers, drives these changes, and (iv) individuals experience cognitive costs when dealing with complex environments that they are willing to pay to avoid.  Our findings demonstrate that the reporting of redundant information may induce equilibria that feature improved outcomes compared to simpler, more direct reporting systems, and point out the importance of complexity when trying to induce truthful information revelation.

Abstract

Leveraging novel happiness data, we show how they can help us understand both reference dependence and motivated beliefs.  We provide four new findings: i) happiness responds to changes relative to different reference points in heterogeneous ways---subjects exhibit loss neutrality with respect to the political status quo (i.e., the incumbent presidential party), but hedonic loss aversion with respect to the expected electoral outcome; ii) the speed of hedonic (i.e., reference point) adaptation to status quo changes is much slower than to surprises; iii) beliefs impact happiness in a nonlinear way; and iv) both ``objective'' and motivated subjective beliefs influence happiness reactions.