May 09, 2018
Limited Cognitive Ability and Selective Information Processing
Benson Tsz Kin Leung, Toulouse School of Economics
This paper studies the information processing behavior of a decision maker (DM) who has limited processing ability. More specifically, the DM is subject to a processing capacity constraint. Before he takes an action which generates a state-dependent payoff, the DM decides whether to process or ignore signals about the state of the world as he receives them sequentially. I show that at the optimum, the DM processes only strong (convincing) enough signals, but is willing to process a weaker signal if it confirms his existing strong belief or if it suggests some favorable outcomes. It explains some well-documented phenomena, which includes preference for strong signals, confirmation bias for individuals with strong prior and wishful thinking. Moreover, I analyze how the Internet, and in general a change in information structure, affects the processing behavior of the DM. The results shed light on different issues in the information era, including polarization and media strategy.