Cognitive Dissonance, Imperfect Memory and the Preference for Increasing Payments
AbstractIn this paper we propose a theory of cognitive dissonance through imperfect memory. Cognitive dissonance is the tendency of a person to engage in self justification after a decision. We offer an interpretation of the single decision cognitive dissonance experiments: an agent has an unknown cost of effort and before the decision receives a private signal of the cost of effort, which is subsequently forgotten. Following the decision, the agent makes an inference regarding the content of this signal based on the publicly available information: the action taken and the wage paid. We explore the implications of this interpretation in a setting requiring a decision of effort in two periods. A preference for increasing payments naturally emerges from our model. With the auxiliary assumption that obtaining wage income requires an unknown cost of effort and obtaining rental income requires a known, zero cost of effort, our results provide an explanation for the experimental findings of Loewenstein and Sicherman (1991). These authors find evidence of stronger preferences for increasing "income from wages" rather than "income from rent." Our model makes the novel prediction that this preference for increasing payments will only occur when the contracts are neither very likely nor very unlikely to cover the cost of effort.
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Bibliographic InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200705.
Length: 20 pages
Date of creation: 15 Aug 2007
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Cognitive Dissonance; Increasing Payments; Imperfect Memory; Imperfect Recall; Self-Perception Theory;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-03 (All new papers)
- NEP-CBE-2007-11-03 (Cognitive & Behavioural Economics)
- NEP-EXP-2007-11-03 (Experimental Economics)
- NEP-LAB-2007-11-03 (Labour Economics)
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