An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness

David Hirshleifer and Ivo Welch

No 1306, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important in stable environments than in volatile ones, and provides other empirical implications relating memory and environmental variables to the continuity of decisions.

Keywords: Memory; inertia; amnesia; behavioral economics (search for similar items in EconPapers)
JEL-codes: D7 D8 L2 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2001-06
New Economics Papers: this item is included in nep-ent, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d13/d1306.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness (2009)
Working Paper: An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness (2009)
Journal Article: An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness (2002)
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:cwl:cwldpp:1306

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().