Availability heuristic in the Real Business Cycle Model

Abstract

This research proposes a macroeconomic model that extends the Real Business Cycle framework by incorporating the availability heuristic, a cognitive bias in human decision-making. This model recognizes that agents may be subject to attentional bias, which can result in suboptimal consumption and investment choices. Specifically, it examines how the availability heuristic, whereby individuals place greater weight on easily and recent retrievable information, can lead to inefficient allocation of resources. The model proposed assumes that agents use current productivity to predict future aggregate productivity, following an AR(1) process, despite the actual aggregate productivity following an AR(2) process. However, given the complexity inherent in solving these models, numerical simulations are not attempted. Instead, the focus is on developing a theoretical framework to explain how attentional bias may affect economic outcomes within the RBC model. The difficulty in solving these types of models arises from their nonlinear and dynamic nature, as well as the intricate interplay of behavioural factors. Consequently, the contribution is limited to proposing a theoretical model and providing a nuanced understanding of the potential implications of incorporating behavioural factors into macroeconomic analysis. This work adds to the growing body of literature in behavioural macroeconomics, highlighting the need to consider human behaviour when examining economic outcomes.