Memory of Past Experiences and Economic Decisions

Abstract

Abstract In traditional economic models, memories of past experiences affect choices only to the extent that they represent information. This chapter reviews recent advances in economic research that have introduced a role for long-lasting effects of personal past experiences and the memory thereof into economics. It first documents the empirical evidence on long-lasting experience effects in finance and economics. The chapter then discusses the main approaches the literature has taken in incorporating psychological theories of long-lasting memories into economics. These results suggest a role for models of memory in accounting not only for micro-level phenomena but also for anomalies within asset pricing and macroeconomics more broadly.