Essays on understanding and beliefs
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This dissertation consists of three essays studying economic agents making decisions under uncertainty. I introduce and study two non-standard choice models which relax different aspects of the standard model. The first essay models an agent who may be optimistic. Theories of optimism typically hypothesize that optimism is driven by agents changing their beliefs, or view of the world. I hypothesize that agents maintain their view of the world, but form optimistic beliefs by distorting the information used to update beliefs in a motivated way. I behaviorally identify the (possibly distorted) information used to update beliefs and provide a novel behavioral definition of optimism that alters Dynamic Consistency to account for both the distorted information and the optimistic nature of the distortion. The second essay models an agent who may imperfectly understand acts---mappings from states to outcomes. Given an act, I model coarse understanding using partitions of the state space: for each cell of the partition, the agent knows the set of outcomes that she could receive if the true state lies in that cell, but within each cell she is unable to match states with outcomes. A key feature of the model is that the agent may understand different acts using different partitions, which captures the idea that the structure of an act can affect the agent's understanding. This allows us to differentiate limited understanding of acts from coarse contingencies and ambiguity aversion, both related phenomena, using only static choice of acts. Our main results axiomatically characterize this model and uniquely identify the partitions used to understand acts. The third essay applies the coarse understanding model to a standard auction design setting, where bidders may imperfectly understand how the allocation and payments depend on the bid profile. The main result shows that it is optimal for the auctioneer to design the auction so that bidders fully understand their win probability and payment when truthfully revealing their type. This offers another point of contrast with the ambiguity literature, where it is optimal for the auctioneer to design the auction so that each bidder's payoff is independent of other bidders' bids.