It is well established that the estimated magnitude of memorized stimuli is biased: small magnitudes are overestimated and large magnitudes are underestimated, a phenomenon known as 'contraction bias.' In a previous study monkeys were trained to memorize the frequency of a vibrotactile stimulus (Base) and compare it with the frequency of a second stimulus (Comparison) while single unit activity was recorded in their prefrontal cortex (Romo et al. (1999), Nature, 399:470-473). We identified that the pattern of errors made by the monkeys is consistent with the contraction bias, providing an opportunity to study this phenomenon both at the level of behavior and at the level of neural activity. Here we address two questions: (1) What are the computational principles and (2) the neural mechanisms underlying the contraction bias? (1) We show that contraction bias is consistent with Bayesian inference, in which a noisy measurement is combined with a-priori knowledge about the distribution of Base magnitudes in order to improve performance. According to the Bayesian hypothesis, increasing the level of uncertainty in the magnitude of the memorized stimulus enhances the bias. This uncertainty is a function of the delay between the Base and Comparison frequencies, as the performance level of the monkey decreases with the duration of the delay. Indeed, as expected from the Bayesian hypothesis, the longer the delay between the Base and Comparison frequencies, the greater the bias. According to the Bayesian hypothesis, monkeys utilize the prior distribution of Base frequencies in their decision making process. In order to study how the monkeys estimate this prior distribution, we analyzed the dependence of the monkeys' decisions on the recent history of stimuli presented to them in the experiment. We show that the estimated prior distribution depends mostly on the recent history of several previous trials. (2) The firing rate of many prefrontal cortex neurons during the delay period is a monotonic function of the Base stimulus frequency. It has been suggested that decisions in the discrimination task are made by comparing this activity with the neural representation of the Comparison frequency. Thus, the contraction of the memorized frequencies should be reflected in the activity of the prefrontal cortex neurons, resulting in the biased decisions. By studying how past trials affect neural activity in the prefrontal cortex, we seek to identify the neural correlate of the contraction bias.