Working Paper: NBER ID: w25200
Authors: Daniel J. Benjamin
Abstract: Errors in probabilistic reasoning have been the focus of much psychology research and are among the original topics of modern behavioral economics. This chapter reviews theory and evidence on this topic, with the goal of facilitating more systematic study of belief biases and their integration into economics. The chapter discusses biases in beliefs about random processes, biases in belief updating, the representativeness heuristic as a possible unifying theory, and interactions between biased belief updating and other features of the updating situation. Throughout, I aim to convey how much evidence there is for (and against) each putative bias, and I highlight when and how different biases may be related to each other. The chapter ends by drawing general lessons for when people update too much or too little, reflecting on modeling challenges, pointing to areas of economics to which the biases are relevant, and highlighting some possible directions for future work.
Keywords: Probabilistic Reasoning; Judgment Biases; Behavioral Economics
JEL Codes: D03; D90
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gambler's fallacy (H27) | hot hand bias (G41) |
| gambler's fallacy (H27) | belief updating (D83) |
| gambler's fallacy (H27) | decision-making under risk (D81) |
| belief updating (D83) | decision-making under risk (D81) |
| hot hand bias (G41) | belief updating (D83) |
| hot hand bias (G41) | decision-making under risk (D81) |