DP12546 On Second Thoughts, Selective Memory, and Resulting Behavioral Biases

Author(s): Philippe Jehiel, Jakub Steiner
Publication Date: December 2017
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12546

A proposed model of information processing generates a prediction about the constrained-optimal stochastic choice that is robust to details of the feasible information structures. A decision-maker processes payoff-relevant information until she reaches her cognitive constraint, at which point she either terminates the decision-making and chooses an action, or restarts the process. By conditioning the probability of termination on the information collected, she controls the correlation between the payoff state and her terminal action. The constrained-optimal choice rule exhibits (i) confirmation bias, (ii) speed-accuracy complementarity, (iii) overweighting of rare events, and (iv) salience effect.