Sensitization and Extraordinary Persistence

Benjamin Keefer
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Benjamin Keefer: Carleton College

No 2016-01, Working Papers from Carleton College, Department of Economics

Abstract: We propose a behavioral model in which an agent’s attitude toward loss is affected by memories of prior losses. Due to the availability heuristic, memories of prior loss sensitize the agent and increase the weight assigned to prospective losses. Because memories of firsttime experiences exhibit multi-decade persistence in recall, our model helps explain recent empirical findings that major events can have multi-decade effects on choices. We further demonstrate consistency with stochastic dominance, so that sensitized individuals will prefer distributions demonstrating firstand second-order stochastic dominance. In an overlapping generations version of Tirole’s (2006) liquidity-scale framework, our model generates procyclical investment.

JEL-codes: D81 E44 G32 (search for similar items in EconPapers)
Date: 2016-07
Note: In Copyright
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