INFLATIONARY SALARY MECHANISMS

DO FIRMS HAVE SHORT MEMORIES?: EVIDENCE FROM MAJOR LEAGUE BASEBALL

Andrew Healy

A growing, and now large, body of evidence indicates that economic agents often do not conform to the classical rational model of behavior. In many cases, bounded rationality better describes behavior (Kahneman, 2003; Simon, 1957). Rather than carefully considering all available information, agents often rely on rules of thumb to solve problems, particularly when those problems are complex (Tversky & Kahneman, 1974). One rule of thumb that may cause significant inefficiencies involves limited memory. Psychological research shows that people tend to primarily remember only salient events (Thompson, Reyes, & Bower, 1979). If economic ...

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