Benjamin Enke, Thomas Graeber, 18 April 2020

When making economic decisions, people are often aware that they do not know the optimal thing to do. Traditional models of economic decision-making do not account for this ‘cognitive uncertainty’. This column argues that cognitive uncertainty predicts economic actions and beliefs because, in binary settings, it induces people to implicitly compress probabilities towards a 50:50 ‘mental default’. This partially explains behavioural anomalies in choice under risk, choice under ambiguity, belief updating, and survey forecasts of economic variables.

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