The Streetlight Effect in Data-Driven Exploration

Johannes Hoelzemann, Gustavo Manso, Abhishek Nagaraj and Matteo Tranchero

No 32401, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine innovative contexts like scientific research or technical R&D where agents must search across many potential projects of varying and uncertain returns. Is it better to possess incomplete but accurate data on the value of some projects, or might there be cases where it is better to explore on a blank slate? While more data usually improves welfare, we present a theoretical framework to understand how it can unexpectedly decrease it. In our model of the streetlight effect, we predict that when data shines a light on attractive but not optimal projects, it can severely narrow the breadth of exploration and lower individual and group payoffs. We test our predictions in an online lab experiment and show that the availability of data on the true value of one project can lower individual payoffs by 17% and reduce the likelihood of discovering the optimal outcome by 54% compared to cases where no data is provided. Suggestive empirical evidence from genetics research illustrates our framework in a real-world setting: data on moderately promising genetic targets delays valuable discoveries by 1.6 years on average. Our paper provides the first systematic examination of the streetlight effect, outlining the conditions under which data leads agents to look under the lamppost rather than engage in socially beneficial exploration.

JEL-codes: C73 C92 D81 D83 O31 (search for similar items in EconPapers)
Date: 2024-05
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