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Base-Rate Neglect and Imperfect Information Acquisition


Wichardt, Philipp C; Blavatskyy, Pavlo R (2005). Base-Rate Neglect and Imperfect Information Acquisition. Working paper series / Institute for Empirical Research in Economics No. 233, University of Zurich.

Abstract

Base-rate neglect is a robust experimental finding that individuals do not update their prior beliefs according to the Bayes' rule and, typically, underestimate their posterior probabilities. Another empirical finding is that individuals often do not acquire information even when there are no strategic considerations and the cost of new information is justifiableneconomically. This paper combines these two different fields of research. Specifically, it is demonstrated that base-rate neglect may lead to imperfectninformation acquisition. An application to the pricing of new financial assets as well as general implications for the socially optimal pricing of information are discussed.

Abstract

Base-rate neglect is a robust experimental finding that individuals do not update their prior beliefs according to the Bayes' rule and, typically, underestimate their posterior probabilities. Another empirical finding is that individuals often do not acquire information even when there are no strategic considerations and the cost of new information is justifiableneconomically. This paper combines these two different fields of research. Specifically, it is demonstrated that base-rate neglect may lead to imperfectninformation acquisition. An application to the pricing of new financial assets as well as general implications for the socially optimal pricing of information are discussed.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:March 2005
Deposited On:29 Nov 2011 22:32
Last Modified:07 Dec 2017 10:10
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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