Nikhil Vellodi, PSE

"A Theory of Self-Prospection"

Abstract

A present-biased decision maker (DM) faces a two-armed bandit problem whose risky arm generates random payoffs at exponentially distributed times. The DM cannot perfectly observe payoff outcomes, instead receiving feedback regarding outcomes. Our main finding is that, in the unique stationary Markov perfect equilibrium of the multi-self game, positive feedback supports greater equilibrium welfare than both negative and transparent feedback. It does so by encouraging the DM to self-prospect --- look to the distant future when acting today. We relate our results to findings in psychology promoting the motivational effects of positive feedback, as well as more recent findings regarding self-prospection theory.

Joint with Polina Borisova

Contact person: Julia Salmi