Bounded Memory and Biases in Information Processing

Research output: Contribution to journalArticle

27 Scopus citations

Abstract

Before choosing among two actions with state-dependent payoffs, a Bayesian decision-maker with a finite memory sees a sequence of informative signals, ending each period with fixed chance. He summarizes information observed with a finite-state automaton. I characterize the optimal protocol as an equilibrium of a dynamic game of imperfect recall; a new player runs each memory state each period. Players act as if maximizing expected payoffs in a common finite action decision problem. I characterize equilibrium play with many multinomial signals. The optimal protocol rationalizes many behavioral phenomena, like "stickiness," salience, confirmation bias, and belief polarization.

Original languageEnglish (US)
Pages (from-to)2257-2294
Number of pages38
JournalEconometrica
Volume82
Issue number6
DOIs
StatePublished - Nov 1 2014
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Absent-minded
  • Biases
  • Bounded memory
  • Bounded rationality
  • Imperfect recall
  • Multiselves

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