Memory, Beliefs, and Economic Decisions

Project Information

MemDec

Grant agreement ID: 101097578

DOI

10.3030/101097578

EC signature date 21 April 2023

Start date 1 June 2023

End date 31 May 2028

Funded under

• European Research Council (ERC)

Total cost

€ 1 936 400,00

EU contribution

€ 1 936 400,00

Coordinated by

UNIVERSITA COMMERCIALE LUIGI BOCCONI
Italy

Periodic Reporting for period 1 - MemDec (Memory, Beliefs, and Economic Decisions)

Reporting period: 2023-06-01 to 2025-11-30

Summary of the context and overall objectives of the project

The project seeks to develop and integrated approach between cognitive science and economics to study the role of selective memory and attention in shaping human beliefs, economic decisions and market outcomes. This stands in contrast with the standard rational choice approach which views beliefs and choices as formed on the basis of stable utility functions. The broad goals are, first, to develop theoretical analyses of how selective memory forces and selective attention to features affect expectation formation and decision making in several domains. Second, to develop methods to apply this theory to a range of real world context, in the field and experimental, and to measure the decision makers’ cognitive parameters, selective memory cues, and integrate their analysis with measured attention, reasoning and choice data.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

Three research papers studying the role of selective memory and attention for beliefs, decisions and markets have already been completed and accepted for publication in major international journals.
In “Finance Without Risk” with Bordalo, La Porta and Shleifer, we show that measured expectations about firms’ cash flows exhibit departures from rationality consistent with selective memory and account for cross sectional stock returns typically attributed to risk factors. This paper has been accepted for publication at the Journal of Financial Economics.
In “How People Use Statistics” we develop a model in which memory and selective attention forces shape the use of statistical information. The model produces well known judgment biases in statistical problems and yields new prediction on how these biases should become weaker or revert upon normatively irrelevant changes in a problem’s description. We experimentally test these predictions and find support in the data. This paper is accepted for publication at the Review of Economic Studies.
In “Imagining the Future: Memory, Simulation and Beliefs” we develop a model in which memory forces of frequency, similarity and interference shape the way in which people form beliefs about novel risks, that they have not experiences before. The model connects past experience and measured similarity or belief about the future giving predictions that we confirm in a survey experiment on belief formation about the risk of major cyberattacks. This paper is accepted for publication at the Review of Economic Studies.
Several other papers are at an advanced stage, others at en early stage, and will be completed and published in the second part of the project.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

The project can potentially have a large impact by providing a concrete and predictive theory, with paired empirical methods, for unifying disparate anomalies previously collected under the heterogeneous rubric of “judgment and decision biases” on the basis of selective memory and attention forces. Development, based on this structure, of systematic test and measurement departing from the standard economic practice of inferring preferences from observed choices. Choices are not sufficient to reveal basic preferences because selective memory and attention must also be taken into account. The project will thus improve upon th state of art by offering a systematic strategy for measuring and formalizing these cognitive factors and for integrating them with choice data. Based on research in this first stage of the project, these methods are proving promising to explain individual behaviour and market outcomes in many different contexts.