A Cognitive Foundation for Perceiving Uncertainty

J. Aislinn Bohren (), Josh Hascher (), Alex Imas (), Michael Ungeheuer () and Martin Weber
Additional contact information
J. Aislinn Bohren: University of Pennsylvania
Josh Hascher: University of Chicago
Alex Imas: University of Chicago
Michael Ungeheuer: Aalto University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We propose a framework where perceptions of uncertainty are driven by the interaction between cognitive constraints and the way that people learn about it—whether information is presented sequentially or simultaneously. People can learn about uncertainty by observing the distribution of outcomes all at once (e.g., seeing a stock return distribution) or sampling outcomes from the relevant distribution sequentially (e.g., experiencing a series of stock returns). Limited attention leads to the overweighting of unlikely but salient events—the dominant force when learning from simultaneous information—whereas imperfect recall leads to the underweighting of such events—the dominant force when learning sequentially. A series of studies show that, when learning from simultaneous information, people are overoptimistic about and are attracted to assets that mostly underperform, but sporadically exhibit large outperformance. However, they overwhelmingly select more consistently outperforming assets when learning the same information sequentially, and this is reflected in beliefs. The entire 40-percentage point preference reversal appears to be driven by limited attention and memory; manipulating these factors completely eliminates the effect of the learning environment on choices and beliefs, and can even reverse it. Our results have implication for the design of policy and the recovery of preferences from choice data.

Keywords: Choice Under Risk; Bounded Rationality; Perceptions of Uncertainty; Information; Beliefs; Attention; Memory; Description-Experience Gap (search for similar items in EconPapers)
Pages: 129 pages
Date: 2024-05-01
New Economics Papers: this item is included in nep-dcm, nep-mic and nep-neu
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economics.sas.upenn.edu/system/files/worki ... per%20Submission.pdf (application/pdf)

Related works:
Working Paper: A Cognitive Foundation for Perceiving Uncertainty (2024)
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:pen:papers:24-031

Access Statistics for this paper

More papers in PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 133 South 36th Street, Philadelphia, PA 19104. Contact information at EDIRC.
Bibliographic data for series maintained by Administrator ().