Excerpt
July 10, 2024, Paper: "This review organizes the vibrant recent literature on the cognitive foundations of economic decision-making. At a basic level, this entire literature studies imperfections in cognitive information processing: the ways in which people attend to, remember, aggregate and trade off variables to make economic decisions. A main idea in this literature is that many ostensibly-distinct empirical regularities and anomalies reflect generic simplification strategies that people adopt to reduce information-processing demands. These cognitive strategies can be consolidated into five categories: (i) noisy approximations and resulting behavioral attenuation; (ii) comparative thinking; (iii) reducing cardinality by overweighting what’s salient, gets cued in memory, or is deemed important; (iv) thinking in analogies and categories; and (v) devaluing or shying away from objects one cannot properly evaluate. Work on information processing has both reinvigorated the upstream exchange with cognitive psychology and has started to trickle down into applied fields such as finance, labor and development. I discuss open questions, emphasizing both the need for a unified model that brings together the different simplification strategies emphasized in the literature; and a greater focus on economic applications and multi-agent settings."