BASE RATE NEGLECT FOR THE WEALTH OF INTERACTING PEOPLE

Diemo Urbig

Advances in Complex Systems (ACS), 2010, vol. 13, issue 05, 607-619

Abstract: Previous research investigating base rate neglect as a bias in human information processing has focused on isolated individuals. This study complements this research by showing that in settings of interacting individuals, especially in settings of social learning, where individuals can learn from one another, base rate neglect can increase a population's welfare. This study further supports the research arguing that a population with members biased by neglecting base rates does not need to perform worse than a population with unbiased members. Adapting the model of social learning suggested by Bikhchandani, Hirshleifer and Welch (The Journal of Political Economy100(1992) 992–1026) and including base rates that differ from generic cases such as 50–50, conditions are identified that make underweighting base rate information increasing the population's welfare. The base rate neglect can start a social learning process that otherwise had not been started and thus base rate neglect can generate positive externalities improving a population's welfare.

Keywords: Cognitive biases; base rate neglect; social learning; information cascades; ecological rationality (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0219525910002761

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