'Outlier Blindness': Efficient Coding Generates an Inability to Represent Extreme Values

38 Pages Posted: 29 Mar 2018 Last revised: 12 Aug 2019

See all articles by Elise Payzan-LeNestour

Elise Payzan-LeNestour

University of New South Wales; Financial Research Network (FIRN)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 11, 2019

Abstract

How do people perceive extreme values? Building on a well-established theory from neuroscience, we hypothesize that economic agents are inherently hampered in the way they perceive extreme values because the human brain is organized to devote neural activity to representing the most probable values at the expense of the improbable ones. We find support for this hypothesis in a series of controlled laboratory experiments.

Keywords: Tail risk, Instability, Imprecise perception, Efficient coding, Adaptation, Decision making under uncertainty, Behavioral finance, Neuroeconomics, Experiments

JEL Classification: C91, D87

Suggested Citation

Payzan-LeNestour, Elise and Woodford, Michael, 'Outlier Blindness': Efficient Coding Generates an Inability to Represent Extreme Values (August 11, 2019). Available at SSRN: https://ssrn.com/abstract=3152166 or http://dx.doi.org/10.2139/ssrn.3152166

Elise Payzan-LeNestour (Contact Author)

University of New South Wales ( email )

Australian School of Business
Sydney, NSW 2052
Australia

HOME PAGE: http://www.elisepayzan.com/

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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