An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)
June 1, 2001
Yale ICF Working Paper No. 00-47
Cowles Foundation Discussion Paper No. 1306
Dice Working Paper No. 2000-4
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.
Number of Pages in PDF File: 46
Keywords: Memory, Inertia, Amnesia, Behavioral Economics
JEL Classification: Z1,Z10,Z13,D11,D20,D21,D23,D70,D83,G30,M10working papers series
Date posted: May 17, 2001 ; Last revised: August 20, 2009
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