Payoff-Based Belief Distortion

Peiran Jiao*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Heterogeneous beliefs often arise among people with the same information but different personally experienced payoffs. To explain this, I propose a mechanism in which experienced payoffs distort beliefs: gains lead an agent to relatively underweight negative new signals and thus to become overoptimistic, whereas losses do the opposite. I experimentally test this mechanism and find behaviour consistent with its predictions. The experiment created a setting where payoffs carried no informational value for Bayesian updating, and thus offered a strong test for the effect of payoffs on beliefs. The findings were robust, and distinct from alternative mechanisms in important ways.
Original languageEnglish
Pages (from-to)1416-1444
Number of pages29
JournalThe Economic Journal
Volume130
Issue number629
Early online date21 Feb 2020
DOIs
Publication statusPublished - Jul 2020

JEL classifications

  • d83 - "Search; Learning; Information and Knowledge; Communication; Belief"
  • c91 - Design of Experiments: Laboratory, Individual
  • d81 - Criteria for Decision-Making under Risk and Uncertainty

Keywords

  • PERSONAL-EXPERIENCE
  • RISK-TAKING
  • INVESTORS
  • PSYCHOLOGY
  • AVERSION
  • MATTER
  • BIASES
  • STOCK

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