Why do we so often make poor decisions? Filip Matějka and his theory of rational inattention

He left to do his PhD at Princeton as a mathematician dreaming of a career in business, and returned to Prague’s CERGE-EI as a researcher/economist. Today, Filip Matějka publishes articles in leading economics journals and lectures at the world’s most distinguished universities. Very recently, the European Commission awarded him a prestigious ERC Consolidator Grant following on his previous ERC Starting Grant that he had obtained as the first Czech researcher in the field of economics. He is developing the theory of ‘rational inattention’, looking for patterns and principles in the decision-making of enormously complex entities – us, humans. He seeks ways to account for the unpredictability of our behaviour, uncertainty, lack of attention, and imperfections of human thinking in an equally imperfect world buzzing with noise and beset with errors.

Read the story in Czech translation here.

How, on what basis do we make our decisions when managing limited resources – whether it is our earnings, savings, unexpected bonuses, or even energy and mental capacity? On what do we latch our attention and when do we switch it off? And why? It is questions like these that Filip Matějka hopes to answer.

He is a household name in the world of behavioural economics – as collaborator of a Nobel Prize laureate, recipient of prestigious awards (like the Neuron Prize and the Ministry of Education Prize for Research), participant in notable grant projects, and contributor to high-impact journals. Once you get absorbed in conversation with him, however, you immediately forget that you are talking to a person garlanded with academic accolades.

Filip Matějka has the gift of enormous empathy and he is able to explain fairly complex issues simply and accessibly. Even when you are discussing with him – an expert – matters you are completely clueless about, he will make sure that you do not feel inferior for ‘not having the faintest’.

Compelled by his strong sense of social responsibility, he suspended his own research this year (particularly during the first COVID-19 outbreak) and collaborated with fellow experts as well as politicians on developing measures and plans to mitigate the economic impact of the epidemic; in April, he even joined the Central Crisis Staff of the Czech Government.

“I lost seven kilos in four months; my brain went into overdrive, burning up all that energy,” he recalls the spring coronavirus ultramarathon.

Dispensing wisdom from my ironing board

He is no longer a member of any official governmental advisory body, but in spring he advised – or, more precisely, did his best to advise – the government on how to reduce uncertainty in various areas and on various levels, particularly the uncertainty of economic operators.

“We developed our strategy as early as April, though I’m not entirely happy about it – many measures were implemented late or not at all. I wrote a couple of studies. The first, written in March, discussed economic measures for a lockdown economy. It was helpful and had a large impact. The second study, on which we worked the following month, had a longer-term objective focusing on reducing uncertainty, but the politicians ignored it completely, which is losing us a lot of sleep and a lot of money. Such massive impact of the second wave could have been prevented.”

His words and tone already had an air of scepticism in spring, when I interviewed him on current affairs for Deník N. “I didn’t hesitate to pack my sleeping bag and spend two months seeing almost nothing of my family, holing up with other members of the Staff and working round the clock,” he said back then. “Lots of things are working out, but I’m a little frustrated to be kept waiting for each interaction with the administration. One has to put up with that, but I’m sorry to say that some of their decisions strike me as very unfortunate.”

Filip Matějka does not see our political representatives as the only culprit here, he thinks all of us are at fault to an extent. “We’re unable to speak calmly about the things that won’t take place until a few months down the line. We’re just running around putting out fires. This is harming our future, which will catch up with us, regardless, soon enough. We have to start looking ahead, at least a little bit, even while dealing with the current crisis – and that applies to all of us.”

It is autumn now, and just like back in spring we are talking over videochat. “Here I go again, dispensing wisdom from my ironing board,” he quips. An ironing board in his bedroom, in fact, doubles as a workstation for his laptop, and it is from there that he was ‘broadcasting’ to the Crisis Staff, the National Economic Council, as well as to newspapers and TV stations.

Fun with public affairs

For Filip Matějka, this dramatic year is also the final year of his first ERC grant project. It is due to end in April 2021. Did his counselling services for the state mean falling behind in his schedule? “It’s not too bad. My research was of course harmed in the short term, I didn’t have time to think, I can’t switch between topics, and I’ll admit that, until June, I wasn’t able to do any research. But I’m all caught up now.”

In the long run, however, this experience allowed him to observe the practical repercussions of the issues he had been dealing with only theoretically. “Like what the public is able to keep track of. I also saw in practice that unless information from political representatives is lucid and intelligible, it cannot be viewed as fair. It even helped me find new directions in my research on rational inattention.”

At the same time, he realised he had a penchant public affairs. “The epidemic emergency will, hopefully, soon pass, but we’ll be bearing the brunt of its economic and social fallout for a long time; I think there’s an opening there for my further engagement,” he plans. As we speak, he is also expecting – any day now – the final verdict on whether he has gained the follow-on ERC grant. So far, he has made it to the finals. “One third of the follow-on grant project concerns questions about what the state should and shouldn’t do, and under what circumstances.”

And shortly afterwards, on December 9, the European Commission officially announced its new grant recipients – including Filip Matějka, who was given a €1.15 million ERC Consolidator Grant for the period 2021–2026.

I can’t be disappointed

Although he was peppering the government with advice in the spring and early summer (as were other experts), most of the smart strategies were not implemented (some were, but after an enormous delay). “I really did believe we’d be ready for the second wave. In the Crisis Staff, for instance, I’d give weekly notes and comments on smart quarantine, but all we were told was: ‘Yes, we’ll do that.’ Well, they didn’t.”

And the smart quarantine did not work, as we all found out when the second wave of the epidemic hit its stride. The system for compensating economic damage worked just as poorly or slowly, and the government passed up on many other partial recommendations from the experts.

Does he not sometimes feel anxiety and futility in the face of all this? “No, not really,” says Matějka resolutely. “I’m a pragmatist. An economist should be pragmatic on principle. Economics isn’t a science about money, economics is a science about how people behave in the real world – and that includes politicians. The world is imperfect, people are imperfect, politics can’t work perfectly,” Matějka enumerates. Economists do not study an ideal world but the real one – just the way it is.

So, those without unrealistic expectations, who allow for human imperfections cannot be disappointed? “That’s right, actually. Everybody has their needs, everybody wants to be popular, respected, elected, that’s all a part of it. Democracy will be just as imperfect as ourselves.”

Getting fixated on your pile

What assessment would he make of his first ERC half-decade? Has his project achieved everything he hoped for? “It did, pretty much,” he smiles.

Originally, the project consisted of three branches. They all sprung from the same stem, but each could exist independently of the others and each had to be robust enough to potentially support five years of research. “In order to be good, science should take risks. It’s good to have ambitious plans, which means, however, that you never know in advance where the buds will grow.” Two of the branches did produce green leaves: the exploration of how democracy functions when voters are inattentive, and the mechanisms of mental accounting.

“Our research and our publications on these topics have already made some impact, our colleagues abroad are building on them. And that feels great – when something you’ve discovered motivates others to put in more work,” says the economist contentedly.

Let’s talk a moment about so-called mental accounting, which belongs to the vast field of behavioural economics. Building upon the findings of Nobel Prize laureate Richard Thaler, Filip Matějka has described how oddly, even irrationally, people decide when shopping, and how they commit so many errors in the process. This is because in their heads they divide their money into separate piles, but are unable to rearrange these piles when the circumstances change.

Making things easy for yourself

“Let me give you an example. You’ve got a certain amount of money and you’re making up your mind about what to buy with it that’ll make you most happy. Such a purchase might be some chocolate, a new radio, or having a sauna on holiday. You get a certain sum and you can decide where you’ll put the money. You choose to pay extra so that you can visit a sauna during your vacation. While making changes to your booking, however, you come across an alternative that’s cheaper than the one you’d originally gone for. What will you do with the money you’ve saved? Most people will spend it on something else related to their holiday plans, even though buying the chocolate or the radio would have made them happier.”

Is it because once we have put the money in the ‘holiday’ pigeon-hole, we are unable to move it elsewhere? “Exactly. Richard Thaler described the principle, observing that people make their decision-making easier for themselves, but that’s all he had to say about the topic. We’ve managed to describe and give reasons for it, and back it up with evidence.”

Then there are situations in which we act in the opposite way, but the lapse in judgement is essentially the same. “An example: You have five credit cards with different interest rates. You accidentally earn some extra money – say, a five-thousand bonus to your salary – and you decide to pay off some debt. How would you go about it?”

I’d pay off the debt on the card with the highest interest, I answer. Filip Matějka pauses, then chuckles. “Well, yeah, that’s what the smarter ones would do, but most people will divide up the five thousand and pay a thousand off of each card. We call that naïve diversification. And there’s plenty of examples like this.”

In money matters, Matějka says, people often act very irrationally, one of the reasons being that they take only some of the relevant information into account in order to ‘make things easier for themselves’.

Hands off!

The third branch of his research, the one that ultimately remained ‘fruitless’, involved issues of rational inattention and the actions of the state, but this is precisely the topic he would like to explore in his follow-on ERC project. “The questions I’m asking are, for instance, when should the state try and achieve a given socially desirable goal by direct top-down regulation, when is it sufficient to modify or simplify the existing system, and when ought the state to keep its hands off altogether.”

We do not have to look too far for an example – one may be found in the state’s decision to restrict PCR test prices. “When private patients started complaining about the tests being expensive, the state didn’t think of any better solution than to regulate and put a ceiling on the price. This, however, made labs less willing to carry out the tests, because they were struggling to cover other costs. Unless the state has comprehensive information, it shouldn’t regulate the market in this way,” argues Matějka, who believes that free competition would have worked just as well in this case, and been fairer.

At the same time, he would like to pursue a more practical project, one for which he has collected enormous data sets thanks to his close collaboration with Californian universities. “In the US, huge amounts of money have been invested into healthcare IT systems for sharing patient data. You come to see a doctor, they enter your name into a computer and have all the information at their fingertips. But doctors hate the system, mainly for all sorts of notifications and alerts it bombards them with,” Matějka laughs.

As an aside, calls for a sophisticated and secure system of medical data have been vociferously made in the Czech Republic, but so far all attempts to develop one have failed.

Matějka, along with a team of economists from Berkeley, have obtained system metadata from a dozen Californian hospitals. “We can tell what amount of time a particular doctor spent looking at particular records, what attention they paid to different data types, what mix of patients they consulted on a given day, and how it changed the degree of attention they paid to a given kind of data,” he lists the features of his resource.

He wants to trace in/attention strategies. “How doctors think, what they click on, how many times, how this changes depending on the patients they are dealing with – what handling a very difficult case in the morning does to their attention span, for example. Whether they click on different things and in a different pattern when the person coming to see them is white, black, male or female.”

If Matějka managed to find regularities in the doctors’ behaviour, the systems could then be upgraded so as to help without annoying the user.

  

What will happen if he does not receive the follow-on ERC grant? “I’ll keep doing well and I’ll keep doing my job. It’s just that my salary will be a little lower and, mainly, I won’t be able to afford paying as many students. The grant allowed me to give them pretty decent stipends, they could travel, I helped each of them pay for a study visit at a good foreign school. That won’t be possible any more, but I’ll nevertheless keep digging my own little burrow.”

I couldn’t have turned out differently

While growing up, was he a focused child or an inattentive one? “I sure was an inattentive and distracted kid, but I liked lots of things, and schoolwork was easy for me, I’d get by without studying too hard. I’m very grateful to my parents for all the stimulation they gave me, but I probably owe more to my dad in this respect. I liked maths, I liked thinking about stuff, but it’s not like I’d sit down and pore over something for a long time, not by any means. I did a lot of sports.”

In interviews he often doubts whether free will played any role in his choosing the profession of researcher/economist. “My dad’s a scientist – a chemist. Mum was a banker. I probably couldn’t have turned out differently than something between the two.”

He enjoyed a lot of freedom, but he recalls he was only in the first grade when his father told him: “One day, you might study maths at uni. And then do your PhD in America.” His father never pressured him into anything, he says, but the words came true all the same.

Gladiatorial young physicists

As a gifted student at Christian Doppler Grammar School in Prague, Matějka had an individual curriculum. He represented the school at international physics competitions. “The Czech team of which I was a member won the finals two years in a row (in 1997 and 1998). We were privileged – we didn’t have to go to lessons, I’d only come in during breaks to chat with my classmates,” he reminisces about his atypical secondary school years.

“We’d be given our assignments in October, about seventeen research tasks we were supposed to work on, and prepare for all rounds of the competition. We had to pass an exam at the end of term, but otherwise we studied independently. It was such freedom! Being a gang of smart and curious kids, we wouldn’t do much by way of preparation until, say, February – we used to play video games and football instead – but then, in spring, things would get pretty intense.”

When he entered university, he was determined to become a businessman. He enrolled at the Faculty of Mathematics and Physics (FMP), a natural choice given his talents, and – quite logically for an entrepreneur-to-be – also at the Prague School of Economics and Business (PSEB).

He quit the latter in the third year, however. “By then, I had a little too much on my plate. That year, I went to the States for the first time, for six months, and I dreamt up a PhD at the best school there was – finishing business school no longer seemed so important. Nowadays, when I give lectures at PSEB, I tell my students that while I may have received a few awards and written a paper with a winner of the Nobel Prize in Economics, at PSEB I got a D in macro.”

A prophecy fulfilled

Filip Matějka received a doctor’s degree at one of the most renowned American universities, at Princeton. How did he manage to get in? And is this kind of study expensive?

“Money isn’t much of a concern when you’re doing a PhD there. You pay for your undergraduate and graduate studies, but once you’re at the PhD level, it’s the other way round – they’re paying you.”

But there is a catch. “Provided they want to have you.”

And Filip Matějka worked hard, determined to make sure that they did want to have him. In order to fulfil his dad’s prophecy (“you’ll study maths and then you’ll go on to a good American university”), he started casting about for opportunities as soon as he finished his second year. FMP offered a semester in Kansas, where he had a proper look around and zeroed in on summer research courses at other US schools.

“The offer included a few of the top five schools in my field. I saw the summer schools as an opportunity to show myself off, to demonstrate what I could do, show that I had a good head on my shoulders. And I must have done well, because I was given good references.”

The references paved his way to Princeton. “When someone from the Czech Republic writes them they were a straight-A student, it doesn’t mean a thing to them – they get a hundred thousand such applicants from all over the world. It’s necessary to show off your skills somewhere first,” recommends Filip Matějka to those who would like to follow in his footsteps. “And above all, I don’t think you need to bend over backwards to make it to some crème de la crème uni. There’s plenty of good universities out there, and studying abroad at any one of them is a fantastic experience that may open up new possibilities and broaden your horizons.”

The luxuries of Princeton

So, at twenty-four, Filip the mathematician crossed the ocean… to come back home at twenty-nine as a researcher/economist. The main factor that contributed to his transformation was a certain level of luxury enjoyed by Princeton PhD students.

“In the first two years, I was free to enrol in any class I wanted. There wasn’t a single compulsory course: all I was supposed to do was find a direction – which, however, had to be related to maths – and I had to sit a maths exam at the end of the second year.”

He attended courses in mathematics, physics, neuroscience, biology, and economics. And he did a lot of reading – more than ever before or since.

While in the first year, he developed an enthusiasm for neuroscience. “I felt it was an interesting application for maths, but after a year I understood it would never allow me to grasp the whole thing; as a mathematician, I’d only be able to calculate some detail, one part of a complex project. That didn’t appeal to me, I wanted to view things as a whole, rather than as a sum of parts.”

Attending an economics course, on the other hand, he realised that the questions it asked were similar to those investigated by neuroscience. “How people decide, how they think, their mental processes. And I saw that economics has the potential to encompass some issues fully, from beginning to end, which also gives you freedom in the choice of a topic.”

It was also at Princeton that he met Christopher Sims, later (2011) a recipient of the Nobel Prize. “While navigating my way through economics, I was looking for someone to tell me what the big economics questions were. When I met him for the first time, I got terribly entangled in my own thoughts, but he was very indulgent and patient. We had a talk,” he remembers.

A week later, Matějka approached Sims again, to tell him that he had already solved one of those fundamental questions. “And it took him three minutes to show me I was on completely the wrong track, because I’d treated the problem as a physicist. This was a great help, really. In a few weeks, I did manage to deal with one issue that he himself hadn’t resolved in a paper he’d written. And from then on, we started collaborating. We don’t have a joint project at the moment, but we’re close, both professionally and as friends, he’s even become a member of the Executive and Supervisory Committee at CERGE to help us. He’s such a great guy, and incredibly modest, too.”

And so he became an economist. “But I still think my fate was already decided back when I was a kid,” he laughs.

I’ll be a billionaire

Yet he had left for Princeton with a dream of getting into business. “I thought I’d be a billionaire.” He laughs, while simultaneously asserting that he was dead serious about it. So who knows.

“Generally speaking, getting a PhD makes no sense unless you want to become a researcher. Doing it for the title alone isn’t worth the trouble. But it wasn’t research I was after, nor the title, I just wanted the experience of spending a few years at a top-tier school with interesting people from around the world,” he comments on his motivation at the time. “I worked hard, but I wanted to enjoy myself there, too, to get the maximum out of the opportunity.”

During the time at Princeton, his business visions faded away and he suddenly saw his future in economics. And in the Czech Republic.

Once a year, an enormous job market event is held for economics PhD students. “PhDs from across the US and representatives of large research institutions, universities, and companies convene in one of the big American cities – one that can provide sufficient hotel capacity,” describes Matějka.

“You send out maybe a few dozen applications for various positions you’re interested in, and then, at the job market, you might have perhaps a dozen interviews for those where you’ve passed the first elimination round. CERGE-EI, too, sends its representatives there: we spend three days in a hotel room, with candidates coming in at thirty-minute intervals. We get four hundred applications each year, interview fifty, and then invite the ten most promising to Prague, where we usually make an offer to about three of them. Sometimes we end up closing a deal with just one person. Three years ago, such a person was Ole Jann, who came over from Oxford to help out with my ERC grant. Now he’s already started to form his own group.”

… but living in the Czech Republic is well-nigh perfect

He himself, however, did not attend the job market – despite emphatic recommendations, coaxing, and cajoling. He knew he did not want to stay in the States for good. “I wanted to settle down in Prague, as did Zuzana, my wife. She was living in Belgium – she’d been bored by Princeton – and we weren’t seeing much of each other. Both our families are from Prague, we missed them. We’re convinced that living in the Czech Republic is well-nigh perfect, it was just important for me to make frequent trips abroad, to keep learning from the best and collaborating with them. It turned out over time that it’s possible, though Zuzana’s been left holding the short end of the stick, I’m afraid,” admits Matějka the husband.

That is because she had to give up her job at an embassy to follow her husband on a one-year fellowship in California, along with the rest of their family. “After we returned, it took her a few months to find a job in publishing – a job she’d been yearning for. She got it, but then our whole family went abroad again, for my sake – and she had more waiting to do.” He is grateful to his wife for more than just patience, however: he discusses many issues with her. “Whenever I’m thinking about something more in the ‘public’ domain, she’s the first person I ask for advice. It’s only thanks to her that I’ve managed to avoid saying lots of silly things, while many of the sensible ones are in fact her ideas.”

On returning from America, he did still flirt with his billionaire-businessman dreams – he ran a consultancy, developing logistic plans for large firms including the Pilsner Urquell Brewery, and algorithms for stock market companies. “Perhaps even today you might still see lorries loaded with Pilsner beer following routes based on our plans,” he laughs. At the time, however, he had already taken a part-time position at the economic institute CERGE-EI, and once he had dipped his toe into research, there was no going back.

Freedom to think

Soon afterwards, the thirty-year-old economist received his first grant (a junior grant from the Czech Science Foundation), and with it a certain amount of freedom to conduct his research. “It set me up with money for travel, allowing me to fly to the States, say, three times a year, cultivate contacts, to be where it’s at without having to work at a US university. It turned out that even at CERGE you can do good research, by international standards. A really interesting bunch of people got together here. We had the freedom and the facilities and the time to show what we were worth. And it’s been like that to this day. I think there are quite a few of us at CERGE who could easily be out there, at big-name schools,” he says, making no effort to feign modesty.

And why should he? He has been invited as guest lecturer to Harvard, Stanford, Yale, Oxford, Cambridge, and MIT, his articles are listed as compulsory reading for their students, and the official announcement of the Nobel Prize for Christopher Sims features a reference to Matějka’s work.

The main thing economics gives him, he says, is freedom to think. “We can watch what’s happening in society, describe known phenomena or model what we don’t know. Economics is all around us,” he declares his love for the discipline.

“Also, all I need is a pen and paper. In other disciplines you need pretty expensive machines to examine just one particular thing. We economists can get along fine just by keeping our eyes peeled, thinking, and calculating.”

As has already been mentioned, his topics are uncertainty, inattention, and decision-making. He says that the most important aspect of his research is not any concrete result, but rather general observations about people and the ways they think. “What should emerge from our work are ways of thinking about the world, about people, and about our limited options. Nobody can expect, for instance, that people will make sense of government measures if the cabinet introduces them one day and then, over the course of the night and into the next morning, changes them three more times. We’re unable to keep track of all that,” he asserts emphatically.

And people have a tendency to give up on keeping track of things they do not understand. Especially when the government does nothing to enhance its credibility, fuelling the growth of uncertainty. “And uncertainty causes lots of additional economic troubles, and economic troubles can easily spill over to affect mental health. And that may ultimately be the worst fallout from this crisis – one that is not apparent yet,” he warns.

“And there’s hardly a worse problem than depression.”

Is he not straying slightly from his area of expertise? “No, it’s all connected. One of the problems for an economist is unemployment. And unemployment causes people to feel bad, among other things. When the unemployment rate in society grows by one percent, it could mean that society as a whole gets one percent poorer. If we’re all one percent poorer, we don’t mind it so very much, the economy can deal with that. But the thing is, not everyone becomes poorer to the same extent. A few will be poorer by a lot. And unemployed people are more likely to fall into depression, misfortune mounts up. It’s not so much a matter of money, there are ways of patching up an economic downturn, we can all play a part in that, but we can’t all help patch up a downturn in mental health,” he explains.

He also points to research conducted by his colleagues which indicates that since this spring, there has been an inter-annual rise in various mental disorders and illnesses. “This definitely also has to do with uncertainty. And dealing with pressing matters while ignoring long-term ones.”

No need to play the professor

“A couple of articles I wrote in April discussed this. I was trying to put things in an extremely straightforward way, I probably didn’t even sound like a researcher when I said: ‘The main thing is not to do too much, not to try anything big or ground-breaking,’” he laughs. “When you put things in a scholarly manner, they sound more scientific, but have zero impact.”

He thinks it is more useful to put things simply – even if your erudition goes unrecognised – rather than deliver elaborate scholastic sentences and play the professor, in which case nobody – except a handful equally learned colleagues – is able to make heads or tails of what is being said.

In the last few years, and especially in the most recent one, Matějka has had no lack of media attention; he says he has even paid for a few sessions with professionals to give some polish to his appearances. He considers it important to be able to get one’s findings across to the public.

“Getting to this point, however, has been a journey, too. In the past, I thought it was essential to be appreciated for my work as a researcher, to gain recognition from fellow economists. But I’ve gradually come to understand that the most important thing is for my work to have a purpose. I do basic research – I myself will not see any of it through to practical application, but others can take up my ideas and bring them closer towards a practical goal. That’s what matters. And it’s terribly important to pass our knowledge and experience on to students. A few years ago, me and a couple of my pals were the greenest rookies at CERGE-EI. And we were confident we’d be able to move things forward. These days I have a few colleagues who are a lot younger than me, and in a couple of years they’ll know much more than us. They probably already do. This gives us all the more freedom in choosing what we want to do.”

The author is an editor of Deník N.

Translated by Petr Ondráček