Paying Attention (Due) to Memory Structure: Rethinking Expertise in Financial Cognition

Abstract

This paper proposes a redefinition of the concept of expertise in financial cognition that is rooted in the distinction between two types of memory identified by neuroscience: semantic and episodic. The interrelation between these sibling memory systems parallels Bayesian notions of beliefs and data, respectively, and promises to unify many of the disparate phenomena and mechanisms identified by behavioral economics and finance over recent decades. In particular, a memory structure perspective can potentially resolve one shortcoming of recent models of bounded rationality in economics: the inability to capture comfortably both endogenous salience and neglect. Distinguishing between semantic and episodic memory systems permits more elegant modelling of transitions between exogenous and endogenous direction of attention, and sidles nearer toward more robust models of framing effects and ambiguity aversion. Furthermore, it facilitates another useful distinction between two sorts of neglect error: myopic and scotomatous. Among other applications for economic research, a new, qualitative rendering of bubble dynamics and financial crashes becomes possible from this expertise-memory structure paradigm.