Foregone with the Wind: Indirect Payoff Information and its Implications for Choice

Examination of the effect of information concerning foregone payoffs on choice behavior reveals a complex pattern. Depending on the environment, this information can facilitate or impair maximization. Our study of nine experimental tasks suggests that the complex pattern can be summarized with the assumption that initially people tend to be highly sensitive, and sometimes too sensitive, to recent foregone payoffs. However, over time, people can learn to adjust their sensitivity depending on the environment they are facing. The implications of this observation to models of human adaptation and to problems of mechanism design are discussed.We thank Nick Feltovich, Ernan Haruvy, Rosemarie Nagel and Rajiv Sarin for helpful comments and suggestions. This research was initiated while the first author was visiting the Technion in Haifa. We very much appreciate the hospitality of the Minerva Center.