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When observable cues correlate with optimal choices, habit-driven behavior can alleviate cognition costs. We experimentally study the degree of sophistication in habit formation and cue selection. To this end, we compare lab treatments that differ in the information provided to subjects, holding fixed the serial correlation of optimal actions. We find that a particular cue – own past action – affects behavior only in treatments in which this habit is useful. The result suggests that caution is warranted when modeling habits via a fixed non-separable utility. Despite this sophistication, lab behavior also reveals myopia in information acquisition.

A sender who chooses a signal to reveal to a receiver can often influence the receiver’s subsequent actions. Is persuasion more difficult when the receiver has her own sources of information? Does the receiver benefit from having additional information sources? We consider a Bayesian persuasion model extended to a receiver’s endogenous acquisition of information under an entropy-based cost commonly used in rational inattention. A sender’s optimal signal can be computed from standard Bayesian persuasion subject to an additional constraint: the receiver never gathers her own costly information. We further determine a finite set of the sender’s signals satisfying the additional constraint in which some optimal signal must be contained. The set is characterized by linear conditions using the receiver’s utility and information cost parameters. The new method is also applicable to a standard Bayesian persuasion model and can simplify, sometimes dramatically, the search for a sender’s optimal signal (as opposed to a standard concavification technique used to solve these models). We show that the ‘threat’ of additional learning weakly decreases the sender’s expected equilibrium payoff. However, the outcome can be worse not only for the sender, but also for the receiver.

Consumer reviews may have perverse effects, including delays of adoption in new products of unknown quality when consumers are boundedly rational. When consumers fail to take into account that past reviewers self-select to purchases, a monopolist may manipulate the posterior beliefs of consumers who observe the reviews, because the product price determines the self-selection bias. The monopolist will charge a relatively high price because the positive selection of the early adopters increases the quality reported in the reviews.