'Outlier Blindness': Efficient Coding Generates an Inability to Represent Extreme Values
38 Pages Posted: 29 Mar 2018 Last revised: 12 Aug 2019
Date Written: August 11, 2019
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: Suggested Citation