Memory and Anticipation

We argue that the introduction of memory imperfections into models of economic decision making creates a natural role for anticipatory emotions. The combination of memory imperfections and anticipatory emotions has striking behavioral implications. The first half of the paper shows that agents can rationally select dominated strategies. We consider two applications: Newcomb’s Paradox and the Prisoners’ Dilemma. We provide a resolution for Newcomb’s Paradox and argue that it requires the decision maker to ascribe only a tiny weight to anticipatory emotions. We also demonstrate that, for some ranges of paramters, it is possible to obtain cooperation in the Prisoners’ Dilemma with probability arbitrarily close to unity. The second half of the paper provides a theory of reminders. It shows that people may prefer to be uninformed, or to have coarse information, in situations where, eliminating either memory imperfections or anticipatory emotions, this would not be the case. We provide endogenous explanations for “as-if” overoptimism and cognitive dissonance.