Foundations of Belief Formation: Perceptional and Cognitive Biases, Emotional Coloring, and the Role of Memory
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Ulrike Malmendier, University of California-Berkeley
Cognitive Abilities and Inflation Expectations
AbstractMen who score high on standardized IQ tests display forecast errors for inflation that are 50% lower than forecast errors for other men in a representative sample of Finnish households. High-IQ men, but not others, have consistent inflation expectations over time and their inflation perceptions align with past expectations. Only high-IQ men increase their consumption propensity when expecting higher inflation in line with the consumption Euler equation. High-IQ men are also twice as sensitive to interest-rate changes when making borrowing decisions. Heterogeneity in education, income, or financial constraints do not explain these results. Limited cognitive abilities are thus human frictions to the transmission and effectiveness of economic policy and inform research on heterogeneous agents in macroeconomics and finance.
Emotional Coloring and Belief Formation – Evidence on the Long-lasting Effect of Communist Propaganda
AbstractPolitical propaganda of communist regimes is long lasting and changes people's attitudes towards capitalism for many decades. Even if the communist regime does not survive and a capitalist system is established, people with strong exposure to the communist doctrine hold more negative views about capital markets, are more likely to think that the communist system was superior, and are more likely to vote for the communist party than people whose daily life experiences were in conflict with the claims of communist propaganda. We exploit the regime change in East Germany, i.e., the former German Democratic Republic, which changed from communist to capitalist during German Reunification, to examine how fast people's attitudes change and adapt to the new system. Our results show that people living in regions that were subject to strong political propaganda of the communist regime have not changed their positive attitudes towards communism in a significant manner.
Memory, Attention, and Choice
AbstractWe present a theory in which the choice set cues a consumer to recall a norm, and surprise relative to the norm shapes his attention and choice. We model memory based on Kahana (2012), where past experiences that are more recent or more similar to the cue are recalled and crowd out others. We model surprise relative to the norm using our salience model of attention and choice. The model predicts unstable and inconsistent behavior in new contexts, because these are evaluated relative to past norms. Under some conditions, repeated experience causes norms to adapt, inducing stable – sometimes rational –behavior across different contexts. We test some of the model’s predictions using an expanded data set on rental decisions of movers between US cities first analyzed by Simonsohn and Loewenstein (2006).
- D8 - Information, Knowledge, and Uncertainty
- E7 - Macro-Based Behavioral Economics