Working Paper: NBER ID: w29336
Authors: Ulrike 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: No keywords provided
JEL Codes: E7; G11; G12; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| personal exposure to economic downturns (F44) | alteration in risk perception and decision-making behavior (D91) |
| personal experiences of economic events (E65) | beliefs and risk attitudes (D81) |
| personal experiences can rewire neural connections (C45) | decision-making processes (D70) |
| experiences (Y60) | comparative analysis of outcomes (P51) |
| experience effects (C92) | decision-making changes (D91) |