From perception to action: An economic model of brain processes

We build on research from neurobiology to model the process through which the brain maps outside evidence into decisions. The sensory system encodes information through cell-firing. Cell-firing is measured against a threshold, and an action is triggered depending on whether the threshold is surpassed. The decision system modulates the threshold. We show that the (constrained) optimal threshold is set in a way that existing beliefs are likely to be confirmed. We then derive behavioral implications. Our mechanism can explain in a unified framework a number of 'anomalies' noted in psychology and economics: (i) belief anchoring (the order in which evidence is received affects beliefs and choices): (ii) polarization (individuals with opposite priors may polarize their opinions after receiving identical evidence): (iii) payoff-dependence of beliefs and (iv) belief disagreement (individuals with identical priors who receive the same evidence may end up with different posterior beliefs). (C) 2011 Elsevier Inc. All rights reserved.