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Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - Noise and Bias: The Cognitive Roots of Economic Errors
AU - Alos Ferrer, Carlos
AU - Buckenmaier, Johannes
AU - Garagnani, Michele
PY - 2025/5
Y1 - 2025/5
N2 - Economic decisions are noisy due to errors and cognitive imprecision. Often, theyare also systematically biased by heuristics or behavioral rules of thumb, creating behavioral anomalies which challenge established economic theories. The interaction of noise and bias, however, has been mostly neglected, and recent work suggests that received behavioral anomalies might be just due to regularities in the noise. This contribution formalizes the idea that decision makers might follow a mixture of rules of behavior combining cognitively-imprecise value maximization and computationally simpler shortcuts. The model delivers new testable predictions which we validate in two experiments, focusing on biases in probability judgments and the certainty effect in lottery choice, respectively. Our findings suggest that neither cognitive imprecision nor multiplicity of behavioral rules suffice to explain received patterns in economic decision making. However, jointly modeling (cognitive) noise in value maximization and biases arising from simpler, cognitive shortcuts delivers a unified framework which can parsimoniously explain deviations from normative prescriptions across domains.
AB - Economic decisions are noisy due to errors and cognitive imprecision. Often, theyare also systematically biased by heuristics or behavioral rules of thumb, creating behavioral anomalies which challenge established economic theories. The interaction of noise and bias, however, has been mostly neglected, and recent work suggests that received behavioral anomalies might be just due to regularities in the noise. This contribution formalizes the idea that decision makers might follow a mixture of rules of behavior combining cognitively-imprecise value maximization and computationally simpler shortcuts. The model delivers new testable predictions which we validate in two experiments, focusing on biases in probability judgments and the certainty effect in lottery choice, respectively. Our findings suggest that neither cognitive imprecision nor multiplicity of behavioral rules suffice to explain received patterns in economic decision making. However, jointly modeling (cognitive) noise in value maximization and biases arising from simpler, cognitive shortcuts delivers a unified framework which can parsimoniously explain deviations from normative prescriptions across domains.
KW - Cognitive Imprecision
KW - Strength of Preference
KW - Noise
KW - Decision Biases
KW - Belief Updating
KW - Certainty Heuristic
M3 - Working paper
T3 - Economics Working Papers Series
BT - Noise and Bias: The Cognitive Roots of Economic Errors
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -