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Banker Compensation and Confirmation Bias

Author

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  • Sabourian, H.
  • Sibert, A.C.

Abstract

Confirmation bias refers to cognitive errors that bias one towards one's own prior beliefs. A vast empirical literature documents its existence and psychologists identify it as one of the most problematic aspects of human reasoning. In this paper, we present three related scenarios where rational behaviour leads to outcomes that are observationally equivalent to different types of conformation bias. As an application, the model provides an explanation for how the reward structure in the financial services industry led to the seemingly irrational behaviour of bankers and other employees of financial institutions prior to the credit crisis of that erupted in the summer of 2007.

Suggested Citation

  • Sabourian, H. & Sibert, A.C., 2009. "Banker Compensation and Confirmation Bias," Cambridge Working Papers in Economics 0940, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0940
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Bankers compensation
      by Kevin Denny in Geary Behaviour Centre on 2009-10-25 14:04:00

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    Cited by:

    1. Anne Sibert, 2010. "Sexism and the City: Irrational Behaviour, Cognitive Errors and Gender in the Financial Crisis," Open Economies Review, Springer, vol. 21(1), pages 163-166, February.
    2. Tajika, Tomoya, 2017. "Persistence and Snap Decision Making: Inefficient Decisions by a Reputation-Concerned Expert," Discussion Paper Series 661, Institute of Economic Research, Hitotsubashi University.

    More about this item

    Keywords

    confirmation bias; belief persistence; overconfidence; signalling; credit crisis;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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