Perceiving Prospects Properly

Jakub Steiner and Colin Stewart

American Economic Review, 2016, vol. 106, issue 7, 1601-31

Abstract: When an agent chooses between prospects, noise in information processing generates an effect akin to the winner's curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception pattern exhibits a key feature of prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events). This bias arises to correct for the winner's curse effect.

JEL-codes: D11 D81 D82 D83 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20141141
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Citations: View citations in EconPapers (47)

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Related works:
Working Paper: Perceiving Prospects Properly (2014)
Working Paper: Perceiving Prospects Properly (2014)
Working Paper: Perceiving Prospects Properly (2014)
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