Working Paper: CEPR ID: DP10123
Authors: Jakub Steiner; Colin Stewart
Abstract: 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.
Keywords: Evolution; Perception Bias; Prospect Theory
JEL Codes: D81; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Noise in decision-making (D80) | Systematic overvaluation of the chosen action (D91) |
| Noise in decision-making (D80) | Biased evaluations of decision alternatives (D91) |
| Noise in decision-making (D80) | Overweighting of small probabilities (D81) |
| Noise in decision-making (D80) | Underweighting of large probabilities (D81) |
| Noise-induced perception errors (D83) | Behavioral biases (D91) |
| Systematic biases (C83) | Optimal responses to noise in decision-making (D87) |
| Perception biases (D91) | Corrective mechanism for the winner's curse (D44) |