Information Projection: Model and Applications.∗

Evidence from both psychology and economics shows that people exaggerate the similarity between the information they have and the information available to others. I present a model of such information projection by assuming that after processing a signal a person overestimates the probability with which this signal is available to others. I apply the model to agency and communication settings. When inferring an expert’s skill using ex-post information, a biased evaluator exaggerates the probability that a skilled expert should have made the right choice, and hence underestimates the expert on average. To minimize such underestimation, the agent will be too reluctant to produce useful information ex ante that will be seen more clearly by the evaluator ex post, and too eager to gather information ex ante that the evaluator will independently learn ex post. Hence increasing costless monitoring might lower productivity and increase production costs at the same time. If ex post the biased evaluator learns information that would have been more useful for high types than for low types, the evaluator over-infers skill from performance. If ex post he learns information that would have been more useful for low types than for high types, he under-infers skill from performance. Evidence from, and applications to, medical malpractice, liability regulation, and effective communication are discussed.