Strategic Bias Shifting: Herding as a Behaviorally Rational Response to Regret Aversion

Jennifer H. Arlen and Stephan Tontrup

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: In this article, we show experimentally that individuals can adapt their decision-making to social environments, like markets, and respond strategically to biases, such as regret aversion. We find they can employ herding as a behaviorally rational strategy to improve their expected outcomes and shift anticipated regret when regret would otherwise bias them towards a suboptimal status quo. Herding can improve decision-making when people observe the choices of professionals and businesses, who are less likely to be biased by regret. Focusing on others’ choices can allow decision makers to shift their reference point, and their bias, to favor their optimal choice. We find that decision makers exploit this process to shift their bias strategically. They seek information when their reference point is not optimal, but block it otherwise. They also strategically select among different types of decision makers and focus on those that made the better decision. Our research suggests that decision makers employ strategies to reduce the welfare effects of biases in certain domains. Policy responses may support private ordering by seeking to complement, rather than substitute for, these strategies.

Keywords: Herding; Debiasing; Strategic Use of Information; Behavioral Self-management; Regret Aversion (search for similar items in EconPapers)
JEL-codes: C91 D03 D81 D83 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:335573

DOI: 10.2139/ssrn.2701415

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