Working Paper: NBER ID: w29273
Authors: Pedro Bordalo; John J Conlon; Nicola Gennaioli; Spencer Yongwook Kwon; Andrei Shleifer
Abstract: People often estimate probabilities, such as the likelihood that an insurable risk will materialize or that an Irish person has red hair, by retrieving experiences from memory. We present a model of this process based on two established regularities of selective recall: similarity and interference. The model accounts for and reconciles a variety of conflicting empirical findings, such as overestimation of unlikely events when these are cued vs. neglect of non-cued ones, the availability heuristic, the representativeness heuristic, as well as over vs. underreaction to information in different situations. The model makes new predictions on how the content of a hypothesis (not just its objective probability) affects probability assessments by shaping the ease of recall. We experimentally evaluate these predictions and find strong experimental support.
Keywords: No keywords provided
JEL Codes: C91; D01; D84; D90
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| memory cues (D91) | selective recall (D91) |
| selective recall (D91) | probability estimation (C13) |
| interference from alternative hypotheses (C12) | underestimation of probability (D80) |
| relevant experiences (Y80) | probability estimates (C13) |
| new data (Y10) | underreaction when hypothesis is likely (D80) |
| new data (Y10) | overreaction when hypothesis is unlikely (C12) |