DP10123 Perceiving Prospects Properly
|Author(s):||Jakub Steiner, Colin Stewart|
|Publication Date:||August 2014|
|Keyword(s):||evolution, perception bias, prospect theory|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10123|
When an agent chooses between prospects, noise in information processing generates an effect akin to the winner?s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference- dependent S-shaped valuations. These biases arise to correct for the winner?s curse effect.