An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness

46 Pages Posted: 17 May 2001 Last revised: 20 Aug 2009

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2001

Abstract

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.

Keywords: Memory, Inertia, Amnesia, Behavioral Economics

JEL Classification: Z1,Z10,Z13,D11,D20,D21,D23,D70,D83,G30,M10

Suggested Citation

Hirshleifer, David A. and Welch, Ivo, An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness (June 1, 2001). Yale ICF Working Paper No. 00-47; Cowles Foundation Discussion Paper No. 1306; Dice Working Paper No. 2000-4. Available at SSRN: https://ssrn.com/abstract=269611 or http://dx.doi.org/10.2139/ssrn.269611

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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