Working Paper: CEPR ID: DP16598
Authors: Ulrike M. Malmendier
Abstract: Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neuroplasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences ("use-dependent brain"). I show that experience effects help understand belief formation and decision-making in a wide area of economic applications, including inflation, home purchases, mortgage choices, and consumption expenditures. I argue that experience-based learning is broadly applicable to economic decision-making and discuss topics for future research in education, health, race, and gender economics.
Keywords: experience effects; learning; beliefs; experts
JEL Codes: G11; G12; G40; G41; E7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| experience of economic downturns (F44) | overestimation of risks (D81) |
| past outcomes (G41) | risk attitudes (D81) |
| neuroplasticity (D87) | economic choices (D10) |
| experience effects (C92) | economic decision-making (D87) |
| personal history (N30) | future beliefs and decisions (D91) |
| past experiences (C92) | biases in decision-making (D91) |