The role of information in choice: toward an economic theory of knowledge and decision making

Abstract

This dissertation develops an analytical framework for the examination of choice in settings of costly information. Throughout the dissertation the importance of information processing costs are emphasized and used as a basis for establishing several points at a very general level. The framework developed in this dissertation can be viewed as a synthesis of several heretofore independent lines of analysis: economic development, the theory of entrepreneurship, adaptive expectations, the economies of search, and temporary equilibrium theory. The framework itself is a basic extension of the optimizing paradime to include the costs of collecting data and information processing. The consequences of this extension contrast in many ways with conventional applications of the paradime.

In the framework developed, information is distinguished from data. Information is defined to be images within an individual's mind, and data is defined to be external, potential sources of information. Information is assumed to be costly and to be able to affect an individual's perception of his opportunities and their relative value (which are themselves information at the moment of decision). The process of decision-making is characterized as an exercise in information processing which is itself costly. Given this specification of the individual choice problem, it is argued that individuals will choose flexible plans, plans which an individual anticipates modifying, rather than rigid plans. Given the existence of reasonably complex circumstances, it is argued that information will be acquired by individuals that causes them to revise their plans. It is argued that a model which includes such information can not be an equilibrium model in the usual sense in any reasonably complex circumstances.