Cognitive limits and preferences for information

The paper under review is to present a theoretical method identifying technological capacities from observed preferences for information toward the decision making problem under curtaining their willingness to pay for payoff-relevant information. The technological capacity, capturing a decision maker's cognitive limitations to satisfy the zero-one law (almost trivial), where limited cognitive processing abilities imply that people may fail to value, and correspondingly to exhibit a higher willingness to pay for -- access to more refined sources of information. Section 2 models observers' information by means of partitions P of the state space \(\Omega\) as a family of non-empty pairwise disjoint subsets of \(\Omega\) such that the union of all sets in P is \(\Omega\) and defines a technological capacity M as a \(\sigma\)-subalgebra of the \(\sigma\)-algebra F on the \(\Omega\). The information generated by the partition P for an observer with technological capacity M, denoted by \(\Sigma (P \setminus M)\) is the family of sets \(U(P) \cap M\) as a \(\sigma\)-algebra. A decision problem is a triple \(D = (A, \sigma_A, u)\) for an action space \(A\) and a utility function \(u: A \times \Omega \to R\) is a bounded real-valued measurable function for the \(\sigma_A\) algebra on A, and an action policy in the decision problem D is a function \(f: \Omega \to A\), and adapted action policy to the partition P in the decision problem D for a decision maker with technological capacity M provided \(f\) is \(\Sigma(P|, M)/\sigma_A\)-measurable. A decision maker with technological capacity M is prefer P to Q, denoted by \(P\ge_M Q\) whenever the following olds for any decision problem \(D=(A, \sigma_A, u)\), \[ V(P|D, M) \ge V(Q|D, M), \] where \(V(P|D, M) = \sup_f \{\int_{\Omega} u(f(\omega), \omega)d\mu (\omega)| f\in F(P|D, M)\}\). The notions given in this paper, although with some simple examples, are not easy to access and comprehend. The heuristic treatment is given in Section 3 and identification of technological capacities is provided in Section 4 with main results in Propositions 1--3. Proposition 1 characterizes an almost trivial technological capacity M as \(P\ge_M Q\) and \(Q\ge_M P\) for any two partitions \(P\) and \(Q\), Proposition 2 identifies the preference system of a decision maker with technological capacity M and M is unique in the sense that any other preference system N of a decision maker implies \(M=N\), and Proposition 3 further characterizes preference system with two different technological capacities. All proofs of Propositions 1--3 are given in the Appendix. Section 5 concludes that the paper does not require any finiteness on \(\Omega\), the decision maker can recover the expected utility of any action policy in any decision problem, and there are robust preferences over partitions that allow the identification of the decision maker's technological capacity, and claims that the limited technological capacity is different from unawareness. It would be nice to have a real economic or financial situation to access those concepts and definitions given in this paper, other than those ad hoc examples presented in the paper. More to think about questions as: Why are those partitions for a technological capacity comparable and how does these concepts lead to solution of a puzzle on low stock-market participation rates, for instance?

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