Agents' Mental Models.

Abstract

Three essays investigating the construction and implications of economic agents' internal representations of problems they face. In the second chapter, "Optimal Auctions under Ambiguity," we investigate the construction of an optimal auction mechanism when agents are ambiguity averse over the valuation of the other bidder. In the third chapter, "Causal Coherence," I investigate agents with differing mental models of the same phenomenon. Agents with the same information and same preferences can make different choices. Agents differ not only with respect to their preferences and information, but their causal interpretations of that information. This can lead to what agents with the correct causal model would perceive as "irrational mistakes" committed by others. I apply an axiomatic representation to develop the causally coherent agent, who has a causal model about a causally ambiguous phenomenon that is consistent with data, makes choices rationally, but is unaware of alternative models. In the fourth chapter, "Of Wolves and Sheep," I place the agents developed in the previous chapter into an economy. In this simple dynamic economy, agents with different theories of how ideas develop into firms leads them to choose different optimal take-up of these ideas. Their different behaviors yields a predator/prey relationship among these agents, which causes natural population cycles of theories and behavior to emerge endogenously. The agents are identical but for their theories (identical data, actions, preferences) so the predator/prey relationship emerges only from their different interpretations of common data. Since the system does not collapse, it shows that agents with differing theories may persist in a long-run, dynamic equilibrium.