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Second-Best Considerations in Correcting Cognitive Biases

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Besharov, Gregory

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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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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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A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
D60 - Microeconomics - - Welfare Economics - - - General

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  1. Zafer Akin, 2008. "Imperfect Information Processing in Sequential Bargaining Games with Present Biased Preferences," Working Papers 0810, TOBB University of Economics and Technology, Department of Economics. [Downloadable!]
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