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Second-Best Considerations in Correcting Cognitive Biases

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  • Besharov, Gregory

Abstract

Studies in psychology and behavioral economics have found that decision-making is replete with cognitive biases. Using stylized examples of time inconsistency, regret, and overconfidence, this paper illustrates possible interactions among them. As is generally true in second-best environments, the existence of biases does not imply the possibility of welfare improvements from correcting them. If only some biases are known, even correction of all known biases has ambiguous effects. With costly correction, the presence of some biases may be optimal. Further, if the correct decision is unknown, then the presence of biases does not imply that mistakes are made.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 01-08.

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Date of creation: 2001
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Handle: RePEc:duk:dukeec:01-08

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Cited by:
  1. Akin, Zafer, 2009. "Imperfect information processing in sequential bargaining games with present biased preferences," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 642-650, August.

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