Can Agents with Causal Misperceptions be Systematically Fooled?

Speaker
Ran Spiegler
Date
21/11/2017 - 13:00 - 11:30Add To Calendar 2017-11-21 11:30:00 2017-11-21 13:00:00 Can Agents with Causal Misperceptions be Systematically Fooled? An agent forms estimates (or forecasts) of individual variables conditional on some observed signal. His estimates are based on fitting a subjective causal model - formalized as a directed acyclic graph, following the "Bayesian networks" literature - to objective long-run data. I show that the agent's estimates are unbiased on average (for any underlying objective distribution) if and only if the agent's graph is perfect - i.e., it directly links every pair of variables that it perceives as causes of some third variable. This result identifies neglect of direct correlation between perceived causes as the kind of causal misperception that can generate systematic prediction errors. I demonstrate the relevance of this result for economic applications: speculative trade, manipulation of a firm's reputation and a stylized "monetary policy" example in which the inflation-output relation obeys an expectational Phillips Curve. Economics building (504), faculty lounge on the first floor אוניברסיטת בר-אילן - Department of Economics Economics.Dept@mail.biu.ac.il Asia/Jerusalem public
Place
Economics building (504), faculty lounge on the first floor
Affiliation
Tel Aviv University and UCL
Abstract

An agent forms estimates (or forecasts) of individual variables conditional on some observed signal. His estimates are based on fitting a subjective causal model - formalized as a directed acyclic graph, following the "Bayesian networks" literature - to objective long-run data. I show that the agent's estimates are unbiased on average (for any underlying objective distribution) if and only if the agent's graph is perfect - i.e., it directly links every pair of variables that it perceives as causes of some third variable. This result identifies neglect of direct correlation between perceived causes as the kind of causal misperception that can generate systematic prediction errors. I demonstrate the relevance of this result for economic applications: speculative trade, manipulation of a firm's reputation and a stylized "monetary policy" example in which the inflation-output relation obeys an expectational Phillips Curve.

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Last Updated Date : 04/12/2022