Memory and Anticipation

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Abstract

The introduction of memory imperfections into models of economic decision making creates a natural role for anticipatory emotions. Their combination has striking behavioural implications. The paper first shows that agents can rationally select apparently dominated strategies. We consider Newcomb's Paradox and the Prisoners’ Dilemma. We provide a resolution for Newcomb's Paradox and argue it requires the decision maker to ascribe only a tiny weight to anticipatory emotions. For some ranges of parameters, 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.

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