Banker Compensation and Confirmation Bias

Hamid Sabourian and Anne Sibert

No 7263, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 financial crisis of that erupted in the summer of 2007.

Keywords: belief persistence; confirmation bias; financial crisis; overconfidence; signalling (search for similar items in EconPapers)
JEL-codes: D81 D82 D83 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-neu
Date: 2009-04
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Working Paper: Banker Compensation and Confirmation Bias (2009)
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