Strategic Bias Shifting: Herding as a Behaviorally Rational Response to Regret Aversion

Journal of Legal Analysis 7, 517 (2015)

NYU Law and Economics Research Paper No. 15-28;

42 Pages Posted: 12 Dec 2015 Last revised: 25 Sep 2017

See all articles by Jennifer Arlen

Jennifer Arlen

New York University School of Law

Stephan Tontrup

New York University School of Law

Date Written: December 9, 2015

Abstract

In this article, we show experimentally that individuals can adapt their decision making to social environments, like markets, and respond strategically to biases, such as regret aversion. We find they can employ herding as a behaviorally rational strategy to improve their expected outcomes and shift anticipated regret when regret would otherwise bias them towards a suboptimal status quo. Herding can improve decision making when people observe the choices of professionals and businesses, who are less likely to be biased by regret. Focusing on others’ choices can allow decision makers to shift their reference point, and their bias, to favor their optimal choice. We find that decision makers exploit this process to shift their bias strategically. They seek information when their reference point is not optimal, but block it otherwise. They also strategically select among different types of decision makers and focus on those that made the better decision. Our research suggests that decision makers employ strategies to reduce the welfare effects of biases in certain domains. Policy responses may support private ordering by seeking to complement, rather than substitute for, these strategies.

Suggested Citation

Arlen, Jennifer and Tontrup, Stephan, Strategic Bias Shifting: Herding as a Behaviorally Rational Response to Regret Aversion (December 9, 2015). NYU School of Law, Public Law Research Paper No. 15-60; Journal of Legal Analysis 7, 517 (2015); NYU Law and Economics Research Paper No. 15-28;. Available at SSRN: https://ssrn.com/abstract=2701415 or http://dx.doi.org/10.2139/ssrn.2701415

Jennifer Arlen (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=20658

Stephan Tontrup

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
+1. 917 535 1165 (Phone)

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