NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Errors in Probabilistic Reasoning and Judgment Biases

Daniel J. Benjamin

NBER Working Paper No. 25200
Issued in October 2018
NBER Program(s):Economics of Aging, Asset Pricing, Corporate Finance, Development Economics, Economics of Education, Environment and Energy Economics, Economic Fluctuations and Growth, Health Economics, Law and Economics, Labor Studies, Public Economics, Political Economy, Productivity, Innovation, and Entrepreneurship

Errors in probabilistic reasoning have been the focus of much psychology research and are among the original topics of modern behavioral economics. This chapter reviews theory and evidence on this topic, with the goal of facilitating more systematic study of belief biases and their integration into economics. The chapter discusses biases in beliefs about random processes, biases in belief updating, the representativeness heuristic as a possible unifying theory, and interactions between biased belief updating and other features of the updating situation. Throughout, I aim to convey how much evidence there is for (and against) each putative bias, and I highlight when and how different biases may be related to each other. The chapter ends by drawing general lessons for when people update too much or too little, reflecting on modeling challenges, pointing to areas of economics to which the biases are relevant, and highlighting some possible directions for future work.

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Document Object Identifier (DOI): 10.3386/w25200

 
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