Detecting regime shifts: the role of construal levels on system neglect

ABSTRACT

Decision-makers overreact to noisy signals and underestimate base rates when predicting regime shift due to system neglect. Based on Construal Level (CL) Theory, I posit that a high CL reduces overreactions in stable and high-noise environments but exacerbates underreactions in unstable and low-noise environments relative to individuals with low CLs. My experimental results support this hypothesis, demonstrating that the interaction between individuals’ mindsets and signals’ properties systematically impact over and underreactions when detecting regime shifts.

KEYWORDS:

• Regime shifts
• construal level theory
• system neglect
• noisy signals

JEL CLASSIFICATION:

• D81
• D83.

Acknowledgments

I want to thank the editor and the reviewer, whose comments helped improve the quality of the manuscript. I would also like to acknowledge the UNSW Business School for funding this research.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ I used two-tailed t-tests for all statistical comparisons.