A Theory of Self-Prospection (joint with Polina Borisova)

A present-biased decision maker (DM) faces a two-armed bandit problem whose risky arm generates random payoffs at exponentially distributed times. The DM cannot perfectly observe payoffs but receives informative feedback. Our main finding is that, in the unique stationary Markov perfect equilibrium of the multi-self game, positive feedback supports greater equilibrium welfare than both negative and transparent feedback. It does so by encouraging the DM to self-prospect --- imagine one's future goals and outcomes when evaluating the present. We relate our results to findings in psychology promoting the motivational effects of positive feedback, as well as more recent findings regarding self-prospection theory.