Events

Professor Robert Akerlof
Professor of Economics
UNSW Business School

Standard economic theory assumes that people have perfect information processing ability: they can derive all logical consequences of information immediately. In reality, however, people struggle to work out the consequences of information. In this paper, we offer a theory of the reasoning process—how people go about “connecting the dots.” In our theory, an agent may have all of the information needed to draw a conclusion yet they still fail to see it. Our key assumption is that agents have limited “working memory.” This constrains the number of pieces of information—“dots”— an agent can think about and connect at once. We explore how agents analyze pieces of information and work their way to a big picture—or, “narrative”—and how narratives, in turn, shape the agent’s view of the parts. We show that limited working memory makes sense of why people struggle with tradeoffs, suffer from choice overload, are influenced by defaults, engage in satisficing, selectively attend to attributes, are subject to primacy effects, and may vacillate between interpretations. We apply the framework to political persuasion, showing how supplying a simple narrative can lock in an interpretation of ambiguous evidence.