An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness
AbstractThis paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important instable environments than in volatile ones, and provides other empirical implications relating memory and environmental variables to the continuity of decisions.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm185.
Date of creation: 01 May 2001
Date of revision: 01 Aug 2009
Memory; Inertia; Amnesia; Behavioral Economics;
Other versions of this item:
- David Hirshleifer & Ivo Welch, 2002. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 379-421, 09.
- David Hirshleifer & Ivo Welch, 2001. "An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness," Cowles Foundation Discussion Papers 1306, Cowles Foundation for Research in Economics, Yale University.
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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