Second-Best Considerations in Correcting Cognitive Biases
Duke University, Economics Working Paper No. 01-08
16 Pages Posted: 2 May 2003
Date Written: November 2002
Studies in psychology and behavioral economics have found that decision-making is replete with cognitive biases. Using stylized examples of time inconsistency, regret, and overconfidence, this paper demonstrates how biases may offset each other and lead to correct decisions. If only some biases are known, even correction of all known biases has ambiguous effects. With costly correction, the presence of some biases may be optimal. Further, if the correct decision is unknown, then the presence of biases does not imply that decision-making is suboptimal.
Keywords: second best, cognitive bias
JEL Classification: A12, D60
Suggested Citation: Suggested Citation