EconPapers    
Economics at your fingertips  
 

Noisy Memory and Over-Reaction to News

Rava Azeredo da Silveira and Michael Woodford ()

AEA Papers and Proceedings, 2019, vol. 109, 557-61

Abstract: We propose a model of optimal decision-making subject to a memory constraint. The constraint is a limit on the complexity of memory measured using Shannon's mutual information, as in models of rational inattention. We show that the model implies that both forecasts and actions will exhibit idiosyncratic random variation; that beliefs will fluctuate forever around the rational-expectations (perfect-memory) beliefs with a variance that does not fall to zero; and that more recent news will be given disproportionate weight. The model provides a simple explanation for a number of features of expectations in laboratory and field settings.

JEL-codes: D83 D84 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/pandp.20191049
References: Add references at CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/pandp.20191049 (application/pdf)
https://www.aeaweb.org/doi/10.1257/pandp.20191049.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Noisy Memory and Over-Reaction to News (2019)
Working Paper: Noisy Memory and Over-Reaction to News (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:apandp:v:109:y:2019:p:557-61

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/subscribe.html

Access Statistics for this article

AEA Papers and Proceedings is currently edited by William Johnson and Kelly Markel

More articles in AEA Papers and Proceedings from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().

 
Page updated 2021-06-15
Handle: RePEc:aea:apandp:v:109:y:2019:p:557-61