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

David Hirshleifer and Ivo Welch

Yale School of Management Working Papers from Yale School of Management

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 instable 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)
Date: 2001-05-01, Revised 2009-08-01
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Citations: View citations in EconPapers (1)

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Related works:
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)
Working Paper: An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness (2001)
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