Base-Rate Neglect and Imperfect Information Acquisition
AbstractBase-rate neglect is a robust experimental finding that individuals do not update their prior beliefs according to the Bayes' rule and, typically, underestimate their posterior probabilities. Another empirical finding is that individuals often do not acquire information even when there are no strategic considerations and the cost of new information is justifiable economically. This paper combines these two different fields of research. Specifically, it is demonstrated that base-rate neglect may lead to imperfect information acquisition. An application to the pricing of new financial assets as well as general implications for the socially optimal pricing of information are discussed.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 233.
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Bayes' rule; base-rate neglect; decision making; information acquisition;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-03-06 (All new papers)
- NEP-EXP-2005-03-06 (Experimental Economics)
- NEP-MIC-2005-03-06 (Microeconomics)
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