Authors: Nicola Gennaioli and Andrei Shleifer
Quarterly Journal of Economics, Vol. 125, No 4, 1399--1433, January, 2010We present a model of intuitive inference, called "local thinking," in which an agent combines data received from the external world with information retrieved from memory to evaluate a hypothesis. In this model, selected and limited recall of information follows a version of the representativeness heuristic. The model can account for some of the evidence on judgment biases, including conjunction and disjunction fallacies, but also for several anomalies related to demand for insurance.