Base-Rate Neglect and Imperfect Information Acquisition

Philipp Wichardt and Pavlo R. Blavatskyy

No 233, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Base-rate neglect is a robust experimental finding that individuals do not update their prior beliefs according to the Bayes' rule and, typically, underestimate their posterior probabilities. Another empirical finding is that individuals often do not acquire information even when there are no strategic considerations and the cost of new information is justifiable economically. This paper combines these two different fields of research. Specifically, it is demonstrated that base-rate neglect may lead to imperfect information acquisition. An application to the pricing of new financial assets as well as general implications for the socially optimal pricing of information are discussed.

Keywords: Bayes' rule; base-rate neglect; decision making; information acquisition (search for similar items in EconPapers)
JEL-codes: C91 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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