Memory and Probability

77 Pages Posted: 20 Sep 2021 Last revised: 18 Nov 2021

See all articles by Pedro Bordalo

Pedro Bordalo

University of Oxford - Said Business School

John J. Conlon

Federal Reserve Banks - Federal Reserve Bank of New York; Harvard University

Nicola Gennaioli

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Spencer Yongwook Kwon

Harvard University

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: September 2021

Abstract

People often estimate probabilities, such as the likelihood that an insurable risk will materialize or that an Irish person has red hair, by retrieving experiences from memory. We present a model of this process based on two established regularities of selective recall: similarity and interference. The model accounts for and reconciles a variety of conflicting empirical findings, such as overestimation of unlikely events when these are cued vs. neglect of non-cued ones, the availability heuristic, the representativeness heuristic, as well as over vs. underreaction to information in different situations. The model makes new predictions on how the content of a hypothesis (not just its objective probability) affects probability assessments by shaping the ease of recall. We experimentally evaluate these predictions and find strong experimental support.

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Suggested Citation

Bordalo, Pedro and Conlon, John J. and Conlon, John J. and Gennaioli, Nicola and Kwon, Spencer Yongwook and Shleifer, Andrei, Memory and Probability (September 2021). NBER Working Paper No. w29273, Available at SSRN: https://ssrn.com/abstract=3926954 or http://dx.doi.org/10.2139/ssrn.3926954

Pedro Bordalo (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

John J. Conlon

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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United States

Harvard University ( email )

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Nicola Gennaioli

Bocconi University - Department of Finance ( email )

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Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

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Italy

Spencer Yongwook Kwon

Harvard University

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Cambridge, MA 02138
United States

Andrei Shleifer

Harvard University - Department of Economics ( email )

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United States
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