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Base-Rate Neglect and Imperfect Information Acquisition

Author

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  • Philipp C. Wichardt
  • Pavlo R. Blavatskyy

Abstract

Base-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.

Suggested Citation

  • Philipp C. Wichardt & Pavlo R. Blavatskyy, "undated". "Base-Rate Neglect and Imperfect Information Acquisition," IEW - Working Papers 233, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:233
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp233.pdf
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    References listed on IDEAS

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    1. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    2. Hurkens, Sjaak & Vulkan, Nir, 2006. "Endogenous private information structures," European Economic Review, Elsevier, vol. 50(1), pages 35-54, January.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    5. Rotheli, Tobias F., 2001. "Acquisition of costly information: an experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 46(2), pages 193-208, October.
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    Cited by:

    1. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundations of Trust and Social Preferences," IZA Discussion Papers 1641, Institute of Labor Economics (IZA).
    2. Armin Falk & Ernst Fehr & Christian Zehnder, "undated". "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    3. Tania Singer & Ernst Fehr, 2005. "The Neuroeconomics of Mind Reading and Empathy," American Economic Review, American Economic Association, vol. 95(2), pages 340-345, May.

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    More about this item

    Keywords

    Bayes' rule; base-rate neglect; decision making; information acquisition;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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