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An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness

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Author Info
David Hirshleifer
Ivo Welch

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Abstract

This paper examines the effect of memory loss on the continuity of behavior. We consider a player (individual or firm) who remembers previous actions but not underlying rationales. In a stable environment, relative to a full-recall scenario, memory loss increases the probability of following old policies (inertia). In a volatile environment, memory loss can decrease this probability (impulsiveness). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important in stable environments than in volatile ones, and provides empirical implications relating memory and environmental variables to economic decisions. Copyright (c) 2002 Massachusetts Institute of Technology.

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Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 11 (2002)
Issue (Month): 3 (09)
Pages: 379-421
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Handle: RePEc:bla:jemstr:v:11:y:2002:i:3:p:379-421

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References listed on IDEAS
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  1. George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000. "Projection Bias in Predicting Future Utility," Economics Working Papers E00-284, University of California at Berkeley. [Downloadable!]
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  2. Kuran, Timur, 1987. "Preference Falsification, Policy Continuity and Collective Conservatism," Economic Journal, Royal Economic Society, vol. 97(387), pages 642-65, September. [Downloadable!] (restricted)
  3. Marco Ottaviani & Giuseppe Moscarini & Lones Smith, 1998. "Social learning in a changing world," Economic Theory, Springer, vol. 11(3), pages 657-665. [Downloadable!] (restricted)
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  4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December. [Downloadable!] (restricted)
  5. Rasmusen, Eric, 1992. "Managerial Conservatism and Rational Information Acquisition," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(1), pages 175-201, Spring.
  6. Arkes, Hal R. & Blumer, Catherine, 1985. "The psychology of sunk cost," Organizational Behavior and Human Decision Processes, Elsevier, vol. 35(1), pages 124-140, February. [Downloadable!] (restricted)
  7. Acs, Zoltan J & Audretsch, David B, 1988. "Innovation in Large and Small Firms: An Empirical Analysis," American Economic Review, American Economic Association, vol. 78(4), pages 678-90, September. [Downloadable!] (restricted)
  8. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June. [Downloadable!] (restricted)
  9. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-51, July. [Downloadable!] (restricted)
  10. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  11. Dixit, Avinash, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-32, Winter. [Downloadable!] (restricted)
  12. Sendhil Mullainathan, 2002. "A Memory-Based Model Of Bounded Rationality," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 735-774, August. [Downloadable!] (restricted)
  13. Dow, James, 1991. "Search Decisions with Limited Memory," Review of Economic Studies, Blackwell Publishing, vol. 58(1), pages 1-14, January. [Downloadable!] (restricted)
  14. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August. [Downloadable!] (restricted)
  15. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Sgroi, D., 2002. "Modelling Experience as Signal Accumulation," Cambridge Working Papers in Economics 0205, Faculty of Economics, University of Cambridge. [Downloadable!]
  2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. John Smith, 2007. "Cognitive Dissonance, Imperfect Memory and the Preference for Increasing Payments," Departmental Working Papers 200705, Rutgers University, Department of Economics. [Downloadable!]
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