Bounded Memory and Biases in Information Processing
Econometrica · 2014 · Volume 82 · Issue 6
Abstract
Before choosing among two actions with state-dependent payoffs, a Bayesian decision-maker with a finite memory sees a sequence of informative signals, ending each period with fixed chance. He summarizes information observed with a finite-state automaton. I characterize the optimal protocol as an equilibrium of a dynamic game of imperfect recall; a new player runs each memory state each period. Players act as if maximizing expected payoffs in a common finite action decision problem. I characterize equilibrium play with many multinomial signals. The optimal protocol rationalizes many behavioral phenomena, like “stickiness,” salience, confirmation bias, and belief polarization.
Keywords
Imperfect recall, bounded rationality, multiselves, bounded memory, absent-minded, biases
Enable JavaScript for citation tools and additional paper interactions.