Learning and the Economics of Small Decisions

Mainstream analysis of economic behavior assumes that economic incentives can shape behavior even when individual agents have limited understanding of the environment (see related arguments in Nash, 1950; Smith, 1962). The shaping process in these cases is indirect: The economic incentives determine the agents’ experience, and this experience in turn drives future behavior. Consider, for example, an agent that has to decide whether to cross the road at a particular location and time. The agent (say a chicken) is not likely to understand the exact incentive structure and compute the implied equilibria. Rather, the agent is likely to rely on experience with similar situations. The economic environment shapes this decision because it determines the relevant experience. The current chapter reviews experimental studies that examine this shaping process. It starts with a focus on studies of "individual decisions from experience." Typical studies of this type involve many trials. In each trial the participant is asked to