Associative Memory and Belief Formation

58 Pages Posted: 29 Oct 2019

See all articles by Benjamin Enke

Benjamin Enke

Harvard University

Frederik Schwerter

University of Bonn

Florian Zimmermann

briq Institute on Behavior and Inequality

Multiple version iconThere are 3 versions of this paper

Date Written: October 9, 2019

Abstract

This paper experimentally studies the role of associative memory for belief formation. Real-world information signals are often embedded in memorable contexts. Thus, today's news, and the contexts they are embedded in, may cue the selective retrieval of similar past news and hence contribute to the widely documented pattern of expectation overreaction. Based on a stylized version of models of associative memory in the literature, we develop a simple and tightly controlled experimental setup in which participants observe sequences of news about the stock market value of hypothetical companies. Here, identical types of news are associated with identical stories and images. In this setup, participants' expectations strongly overreact to recent news. We successfully verify the model's predictions about how the magnitude of overreaction should depend on the history of news. For example, once today's news are associated with the stories and images of previous opposite news, expectations systematically underreact. By exogenously manipulating the scope for imperfect and associative recall in our setup, we further provide direct causal evidence for the role of memory in belief formation and overreaction. Finally, we use our experimental data to estimate the model parameters that govern the strength of imperfect and associative recall over different time horizons.

Keywords: Beliefs, expectations, memory, bounded rationality

JEL Classification: D01

Suggested Citation

Enke, Benjamin and Schwerter, Frederik and Zimmermann, Florian, Associative Memory and Belief Formation (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=3472676 or http://dx.doi.org/10.2139/ssrn.3472676

Benjamin Enke (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Frederik Schwerter

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Florian Zimmermann

briq Institute on Behavior and Inequality ( email )

Schaumburg-Lippe-Strasse 5-9
53113 Bonn
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
59
Abstract Views
439
rank
336,020
PlumX Metrics