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From perception to action: An economic model of brain processes

  • Brocas, Isabelle
  • Carrillo, Juan D.
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    We build on research from neurobiology to model the process through which the brain maps outside evidence into decisions. The sensory system encodes information through cell-firing. Cell-firing is measured against a threshold, and an action is triggered depending on whether the threshold is surpassed. The decision system modulates the threshold. We show that the (constrained) optimal threshold is set in a way that existing beliefs are likely to be confirmed. We then derive behavioral implications. Our mechanism can explain in a unified framework a number of ‘anomalies’ noted in psychology and economics: (i) belief anchoring (the order in which evidence is received affects beliefs and choices); (ii) polarization (individuals with opposite priors may polarize their opinions after receiving identical evidence); (iii) payoff-dependence of beliefs and (iv) belief disagreement (individuals with identical priors who receive the same evidence may end up with different posterior beliefs).

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    File URL: http://www.sciencedirect.com/science/article/pii/S0899825611001758
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    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 75 (2012)
    Issue (Month): 1 ()
    Pages: 81-103

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    Handle: RePEc:eee:gamebe:v:75:y:2012:i:1:p:81-103
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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    1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    2. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February.
    3. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July.
    4. Isabelle Brocas & Juan D. Carrillo, 2008. "Theories of the Mind," American Economic Review, American Economic Association, vol. 98(2), pages 175-80, May.
    5. Glimcher, Paul W. & Dorris, Michael C. & Bayer, Hannah M., 2005. "Physiological utility theory and the neuroeconomics of choice," Games and Economic Behavior, Elsevier, vol. 52(2), pages 213-256, August.
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    7. Chew, Soo Hong & Sagi, Jacob S., 2008. "Small worlds: Modeling attitudes toward sources of uncertainty," Journal of Economic Theory, Elsevier, vol. 139(1), pages 1-24, March.
    8. Fryer Roland & Jackson Matthew O., 2008. "A Categorical Model of Cognition and Biased Decision Making," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-44, February.
    9. H. M. Shefrin & Richard Thaler, 1977. "An Economic Theory of Self-Control," NBER Working Papers 0208, National Bureau of Economic Research, Inc.
    10. Raaj Kumar Sah & Joseph E. Stiglitz, 1984. "The Architecture of Economic Systems: Hierarchies and Polyarchies," NBER Working Papers 1334, National Bureau of Economic Research, Inc.
    11. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
    12. Arthur J. Robson, 2001. "Why Would Nature Give Individuals Utility Functions?," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 900-929, August.
    13. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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