Perceiving prospects properly

Jakub Steiner, Colin Stewart

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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 pattern exhibits a key feature of prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events). This bias arises to correct for the winner's curse effect.
Original languageEnglish
Pages (from-to)1601-1631
JournalAmerican Economic Review
Issue number7
Publication statusPublished - 1 Jul 2016


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