Perceiving prospects properly

Jakub Steiner, Colin Stewart

Research output: Working paperDiscussion paper


When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference-dependent S-shaped valuations. These biases arise to
correct for the winner’s curse effect.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages36
Publication statusPublished - 22 Aug 2014

Publication series

NameESE Discussion Papers


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