Noisy Memory and Over-Reaction to News
Rava Azeredo da Silveira and
Michael Woodford ()
No 25478, NBER Working Papers from National Bureau of Economic Research, Inc
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; but our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. 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, most notably apparent over-reaction of both elicited forecasts and spending decisions to transitory fluctuations in economic time series.
JEL-codes: D91 E71 G41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-upt
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Published as Rava Azeredo da Silveira & Michael Woodford, 2019. "Noisy Memory and Over-Reaction to News," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 557-561, May.
Downloads: (external link)
Journal Article: Noisy Memory and Over-Reaction to News (2019)
Working Paper: Noisy Memory and Over-Reaction to News (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25478
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().