Periodic Reporting for period 2 - MEMEB (The Role of Memory for Economic Belief Formation)
Reporting period: 2022-06-01 to 2023-11-30
The overall goal of this project is to improve our understanding of economic belief formation by incorporating memory processes. For this purpose, we conduct tailored lab experiments that allow us to cleanly study how memory processes and limitations shape the formation of beliefs. This will improve our understanding of biased belief patterns we observe in, for instance, financial markets or the political domain. Such biases in beliefs have been argued to be key determinants of boom and bust cycles and financial crisis.
There has been substantial progress on Part 1a of the proposed research. We have completed work on associative recall and expectation formation as outlined in part 1a of my proposal. This research clearly documents that the associative nature of memory can cause individual-level beliefs to overreact to information. Interestingly, this result extends to price fluctuations on a market level. This research culminated in the completion of a working paper on called "Associative Memory, Beliefs and Market Interactions" (joint with Benjamin Enke and Frederik Schwerter). This paper is now accepted for publication in the peer-reviewed Journal of Financial Economics.
Research outlined in parts 1a and in particular 1b of the proposal has led to a project where we document that contextualised information in the form of stories shapes beliefs in the long-run more strongly compared to abstract statistical information. The underlying reason is that stories are easier retrieved from memory compared to statistics. The the similarity based-nature of nature recall favours the recall of stories versus statistics. Results from this project are published in the working paper "Stories, Statistics and Memory" (joint with Thomas Graeber and Christopher Roth). This paper is currently revise & resubmit (2nd round) in the Quarterly Journal of Economics.
Research outlined in parts 1a and 1b has led to ongoing work on how memory may exacerbate misperceptions of the world. In complex environments, people tend to simplify these environments. Associative memory causes these simplifications to turn into misperceptions. We are currently setting up an experiment to test this idea (joint work with Robin Musolff).
Background research in particular for part 2 of the proposal led to a review paper on motivated memory that was published in a special issue of Games "Motivated Memory - a Review" (joint with Andrea Amelio).
For parts 2a and b, we have worked extensively on the experimental design.
Research outlined in parts 1a and in particular 1b of the proposal has led to a project where we document that contextualised information in the form of stories shapes beliefs in the long-run more strongly compared to abstract statistical information. The underlying reason is that stories are easier retrieved from memory compared to statistics. The the similarity based-nature of nature recall favours the recall of stories versus statistics. Results from this project are published in the working paper "Stories, Statistics and Memory" (joint with Thomas Graeber and Christopher Roth). This paper is currently revise & resubmit (2nd round) in the Quarterly Journal of Economics.
Research outlined in parts 1a and 1b has led to ongoing work on how memory may exacerbate misperceptions of the world. In complex environments, people tend to simplify these environments. Associative memory causes these simplifications to turn into misperceptions. We are currently setting up an experiment to test this idea (joint work with Robin Musolff).
Background research in particular for part 2 of the proposal led to a review paper on motivated memory that was published in a special issue of Games "Motivated Memory - a Review" (joint with Andrea Amelio).
For parts 2a and b, we have worked extensively on the experimental design.
Existing literature on economic beliefs has not really focused on memory. Instead, the literature tends to assume that humans perfectly remember the experiences made and information obtained in the past. We move beyond this state of the art by taking the substantial psychological literature on memory seriously and analysing how it impacts the formation of beliefs. Among other things, we show how memory can impact aggregate economic outcomes, how it gives stories and edge over statistics in terms of belief impact, and how it can lead to substantial misperceptions about the world.