Behavioral economics has been highly successful at cataloguing patterns of bias, inconsistency, and even irrationality in everyday human decision-making. One of the great remaining challenges in the field, however, is to present a coherent explanation for why such behaviors exist, to derive the empirical findings of behavioral economics from theoretical models of how our brains work. This grant funds a joint project by economist Michael Woodford of Columbia University and neuroscientist Rava Azeredo da Silveira of the University of Basel, to develop more realistic models of the role that memory limitations play in generating the patterns of economic behavior documented by behavioral psychologists. Woodford and da Silveira will build a set of theoretical models that incorporate the assumption that memory carries a cost. As agents move through time, they create internalized perceptions of the world. Recalling these internal perceptions with flawless precision, they hypothesize, is very costly, and thus as we move from one period to the next, the rational reluctance to pay this “memory cost” produces an increasingly noisy representation of past internal perceptions, resulting in the systematic deviations from optimality observed by behavioral economists. Grant funds will support the theoretical modeling and comparative analysis, as well as a postdoctoral fellow and graduate student who will work on the project.