Optimally Imprecise Memory and Biased Forecasts

Rava Azeredo da Silveira, Yeji Sung and Michael Woodford

American Economic Review, 2024, vol. 114, issue 10, 3075-3118

Abstract: We propose a model of optimal decision-making subject to a memory constraint in the spirit of models of rational inattention. Our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. The model implies that both forecasts and actions will exhibit idiosyncratic random variation; that average beliefs will exhibit a bias that fluctuates forever; and that more recent news will be given disproportionate weight in forecasts. The model provides a simple explanation for the overreaction to news observed in the laboratory by Afrouzi et al. (2023).

JEL-codes: D83 D84 D91 G12 G41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/aer.20201806

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