# 14-154/VIII (2014-12-16)

Author(s)
Paul Koster, VU University Amsterdam, the Netherlands; Stefanie Peer, Vienna University of Business and Economics, Austria; Thijs Dekker, University of Leeds, United Kingdom
Keywords:
Memory, Transience, Expectation formation, Adaptive expectations, Retrieval Accuracy, Scheduling, Value of Reliability
JEL codes:
A12, D84, R41

This discussion paper led to a publication in 'Economics of Transportation'

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Limited memory capacity, retrieval constraints and anchoring are central to expectation formation processes. We develop a model of adaptive expectations where individuals are able to store only a finite number of past experiences of a stochastic state variable. Retrieval of these experiences is probabilistic and subject to error. We apply the model to scheduling choices of commuters and demonstrate that memory constraints lead to sub-optimal choices. We analytically and numerically show how memory-based adaptive expectations substantially increase commuters' willingness-to-pay for reductions in travel time variability, relative to the rational expectations outcome.