Belief adjustment: a double hurdle model and experimental evidence

Abstract

We present an experiment where subjects sequentially receive signals about the true state of the world and need to form beliefs about which one is true, with payoffs related to reported beliefs. We attempt to control for risk aversion using the Offerman et al. (Rev Econ Stud 76(4):1461–1489, 2009) technique. Against the baseline of Bayesian updating, we test for belief adjustment underreaction and overreaction and model the decision making process of the agent as a double hurdle model where agents with inferential expectations first decide whether to adjust their beliefs and then, if so, decide by how much. We also test the effects of increased inattention and complexity on belief updating. We find evidence for periods of belief inertia interspersed with belief adjustment. This is due to a combination of random belief adjustment; state-dependent belief adjustment, with many subjects requiring considerable evidence to change their beliefs; and quasi-Bayesian belief adjustment, with aggregate insufficient belief adjustment when a belief change does occur. Inattention, like complexity, makes subjects less likely to adjust their stated beliefs, while inattention additionally discourages full adjustment.

Consumption Response Heterogeneity and Dynamics with an Inattention Region

“…2 Randomized controlled trials and laboratory experiments also report that consumer expectation adjustments are affected by the provision of free and salient information, imperfect, and both large and small (Armantier et al, 2016;Khaw et al, 2017;Armona et al, 2018;Roth and Wohlfart, 2020;Henckel et al, 2021). Our model is consistent with these features.…”

“…Laboratory experiments allow to sidestep this limitation by controlling the information available to each individual. These experiments also evidence that individuals adjust their expectations in discrete jumps and sporadically ignore new information (Khaw et al, 2017;Henckel et al, 2021). Taken together, these studies favor models predicting discrete adjustments in expectations.…”

Uncertainty and learning in a technologically dynamic industry: Seed density in U.S. maize

“…In both cases, the estimated adjustments are in the direction suggested by the prevailing agronomic wisdom. Thus, it appears that for both crops we have uncovered evidence of "inertia" in response to information, a phenomenon that has long been observed in laboratory-based studies (Benjamin, 2019;Henckel et al, 2021;Phillips & Edwards, 1966) and also in a variety of real-world circumstances (Handel & Schwartzstein, 2018;Perry et al, 2019). The phenomenon may arise for many reasons, including selectivity when paying attention to data such that biased beliefs and forecasts result (Schwartzstein, 2014).…”

Public goods and bads with vulnerable individuals: How information and social nudges change behaviour

“…Despite most participants answering all quiz questions correctly, inattention and misunderstanding (a factor prevalent in PG games Andreoni 1995a, with its salience increasing under complexity Henckel et al 2022 and decreasing over time Houser and Kurzban 2002) may help explain the results. In the PG game, the increasing trend in average individual contributions among those with MPCRs of 1.20 point to the possibility of learning.…”