Understanding decision making: how memory, beliefs and attention drive our choices

Andrei Shleifer, John L Loeb Professor of Economics at Harvard University, delivered an thought-provoking seminar on cognitive economics at London Business School hosted by the Wheeler Institute. This event was hosted by Sergei Guriev, Dean of London Business School and was moderated by Jean-Pierre Benoît, Professor of Economics at London Business School.

Cognitive economics explores how psychological processes influence decision-making by focusing on memory, beliefs, and attention, cognitive economics challenges traditional models and offers new insights into macro-financial instability, social discrimination, and group conflict.

Shleifer’s work in Cognitive Economics has reshaped the understanding of how cognitive biases influence economic decisions. His papers like, “Memory and Probability” and “Diagnostic Expectations and Stock Returns” explore flawed expectations impact financial and macroeconomic behaviours. Publications such as “Beliefs about Gender” and “Salience” highlight the role of memory, attention, and expectations in economic choices. You can read Andrei Shleifer’s papers here.

Shleifer began his talk by posing thought-provoking questions:

  • “Is President Trump a criminal or a champion of ordinary Americans?”
  • “Is abortion a human right or a murder?”
  • “Is buying a stock a risk or an opportunity?”
  • “Is Avis a loser to Hertz or a better deal because they ‘try harder’?”

These questions reveal a fundamental aspect of human cognition: people often interpret identical information through vastly different perspectives. This divergence lies at the heart of understanding beliefs and decision-making. Shleifer emphasised that we are only beginning to grasp how different mental models of the world shape our thoughts, judgements, and choices. People’s responses to these questions depend on their personal experiences, which are shaped by memories and contextual cues. These factors profoundly affect not just beliefs but also decisions.

What is Cognitive Economics?

In the seminar, Shleifer emphasised, “our choices are shaped not only by logic but by how we remember, perceive, and focus.”

In contrast to traditional economic models, which assume rationality and perfect information, cognitive economics acknowledges the imperfections and complexities of human cognition. The field has its roots in behavioural economics but extends beyond it by integrating concepts from neuroscience and cognitive psychology. A defining feature of cognitive economics, as highlighted by Shleifer, is its goal of creating a unified theory that explains decision-making processes by incorporating the roles of memory, beliefs, and attention.

The theory focuses on the instability and sensitivity of preferences and biases, contrasting it with traditional economic models. Shleifer stressed that understanding cognition requires examining how psychological mechanisms such as memory, attention, and perception shape beliefs and subsequently choices. In contrast, behavioural economics primarily identifies specific deviations from rationality rather than providing a comprehensive framework.

Beliefs, not rational expectations

Beliefs often influenced by prior experiences and environmental cues play a key role in shaping, consumer confidence, market behaviour, and policy preferences. Shleifer emphasised how framing and description of options can impact people’s choices as the people’s preferences are more sensitive to the way information is presented than the information itself.

One example he provided relates to excess volatility in financial markets. In finance, the price of a security corresponds to the present value of its future cash flows. Shleifer demonstrated that excess volatility in financial markets reveals how stock prices often fluctuate more than the present value of their cash flows. This deviation occurs because market participants base their decisions on beliefs influenced by psychological factors, such as overconfidence, which can amplify price fluctuations and create volatility, which exceeds fundamental economic indicators. Evidence shows that markets are often overly optimistic, leading to forecastable expectation errors that correlate with returns. These errors contribute to a substantial, predictable component of long-term fluctuations in the stock market.

Memory and inference

Memories, rather than being perfect records, are records, are reconstructions shaped by emotions and selective recall, Shleifer explained that cognitive economics focuses on the first step of representation, which is automatic and mechanical.

Shleifer introduced the concept of ‘diagnostic expectations,’ suggesting that people disproportionately rely on accessible memories when forming beliefs about future outcomes leading to biased judgements. This principle also sheds light on stereotypes, which are systematically distorted representations of groups.

For instance, Shleifer highlighted the exaggeration of belief differences between men and women on gender issues. These differences are often magnified compared to actual disparities in views. A similar bias is observed in the US, where perceived polarisation between liberals and conservatives exaggerates true disagreements, regardless of whether a Democrat or Republican is forming the belief.

Similarity, context and cues

Shleifer emphasises that patterns of similarity between mental states playing a key role in shaping cues for memory retrieval and beliefs:

  • Contiguity -similarity in mental context between contiguous studied words
  • Recency -current mental context similar to recently studied words
  • Primacy -similarity of the first studied word to the broader context) together shape another key memory object: cues

To illustrate the impact of memory retrieval on beliefs, Shleifer described the “Survey of Beliefs” experiment. This study focused on assessing the probability of a significant cyberattack in the next five years, which could cause substantial damage to the US economy and infrastructure. Participants were asked to estimate this probability, and their responses were influenced by their personal database of experiences, such as financial troubles or the loss of a loved one.

The study measured how these experiences shape beliefs by eliciting perceived similarities between personal experiences and the concept of a cyberattack. To further explore this, some participants are primed by being asked to recall a relevant experience before assessing the probability of a cyberattack. The study showed that certain lived experiences, which may otherwise be forgotten, can be brought to the forefront through priming, subsequently influencing the beliefs and probability estimation of participants in the experiment.

The role of Attention

The discussion also addressed attention, emphasising its complexity relative to memory and its role in shaping beliefs and decisions. Attention is a limited and selective resource that determines the information people process and prioritise, directly influencing their decisions. Retail environments, for instance, exploit attention biases by strategically placing products to capture focus. Shleifer noted that similar principles apply to policy design, where effective communication must capture limited public attention to drive engagement and action.

Shleifer illustrated the inference problem through a compelling example involving taxicabs. Imagine a scenario where a blue and a green taxi operate in a city, and a witness identifies a green taxi involved in an accident. However, the witness’s reliability is only 80%, and the actual distribution of taxis in the city is 75% blue and 25% green. The challenge lies in interpreting these probabilities to infer the most likely scenario. This example illustrates how human intuition often struggles with combining information (in this case probabilities) correctly, a core issue in understanding belief formation and decision-making under uncertainty. It highlights how people’s answers are influenced by their focus on different features of the problem.

How do people solve problems?

The tension between familiarity, framing, and focus lies at the heart of cognitive economics a rapidly emerging field that is reshaping understanding of decision-making. As individuals face uncertainty, they often rely on personal experiences to prioritise information, with memories they recall playing a significant role in shaping their choices.

The way a problem is framed—shaped by memory and attention—determines how people interpret and approach issues, leading to variations in decision-making. Cognitive economics recognises that these cognitive biases, often overlooked in traditional models, influence everything from market dynamics to policy preferences.

Shleifer’s talk expanded how understanding how memory, beliefs, and attention shape choices, and the role of Cognitive Economics offering key insights into human behaviour. As the research in the field continues to evolve, it holds the potential to transform industries and provide solutions to the complex challenges of modern decision-making.

A recording of this event is now available on the Wheeler Institute YouTube channel.


About the speaker

Andrei Shleifer is John L Loeb Professor of Economics at Harvard University. He has worked in the areas of comparative corporate governance, law and finance, behavioral finance, as well as institutional economics. He has published seven books and is an Editor of the Quarterly Journal of Economics, and a fellow of the Econometric Society, the American Academy of Arts and Sciences, and the American Finance Association. Shleifer is a previous winner of the John Bates Clark medal of the American Economic Association. According to RePEc, Shleifer is the most cited economist in the world.

About the moderator

Jean-Pierre Benoît is Professor of Economics at London Business School, his is also a fellow of the British Academy and a fellow of the Econometric Society. He is also a winner of the Best Teacher Award in the EMBA programme. He is an expert in microeconomic theory, industrial organisation, game theory, and law and economics. His research has been published in leading economics, political science and law journals, and encompasses a range of subjects, including auctions, voting theory, dynamic competition, entry deterrence, affirmative action, overconfidence and apparent behavioural biases. Before joining the school, he was Professor of Economics and Professor of Law at New York University.


About the series

The Wheeler Institute’s Rethinking Capitalism series is a series that fosters important debates surrounding existing notions and assumptions about capitalism. The series invites prominent guests and thought leaders to contribute their insights and perspectives on different approaches to creating a more equitable and sustainable economic system. By bringing together diverse viewpoints and expertise, the Rethinking Capitalism series aims to spark meaningful dialogue and inspire new solutions for the challenges facing our world today.

Many leading voices from the world of economics and business have contributed to this discussion already, including Daron Acemoglu, Gita Gopinath, Oded Galor, Esther Duflo, Abhijit Banerjee, Thomas Philippon, and Rebecca Henderson.


About the author

Gabriela Tomova (MIF 2025) is a Masters in Finance student at London Business School. Prior to the MiF, she completed her undergraduate studies in Economics at Erasmus University and worked at the London office of JPMorgan in product development with a focus on fintech and technology in capital markets. Gabriela is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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