Perceiving Prospects Properly

Posted: 30 Sep 2014

See all articles by Jakub Steiner

Jakub Steiner

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: August 2014

Abstract

When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference- dependent S-shaped valuations. These biases arise to correct for the winner’s curse effect.

Keywords: evolution, perception bias, prospect theory

JEL Classification: D81, D83

Suggested Citation

Steiner, Jakub, Perceiving Prospects Properly (August 2014). CEPR Discussion Paper No. DP10123, Available at SSRN: https://ssrn.com/abstract=2501606

Jakub Steiner (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
+420 605 286 947 (Phone)

HOME PAGE: http://www.cerge-ei.cz

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