Confirmation bias refers to cognitive errors that bias one towards one's own prior beliefs. A vast empirical literature documents its existence and psychologists identify it as one of the most problematic aspects of human reasoning. In this paper, we present three related scenarios where rational behaviour leads to outcomes that are observationally equivalent to different types of conformation bias. As an application, the model provides an explanation for how the reward structure in the financial services industry led to the seemingly irrational behaviour of bankers and other employees of financial institutions prior to the financial crisis of that erupted in the summer of 2007.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
7263.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Avery, Christopher N. & Chevalier, Judith A., 1999.
"Herding over the career,"
Economics Letters,
Elsevier, vol. 63(3), pages 327-333, June.
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