Good news and bad news are still news: experimental evidence on belief updating

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Abstract

Bayesian updating remains the benchmark for dynamic modeling under uncertainty within economics. Recent theory and evidence suggest individuals may process information asymmetrically when it relates to personal characteristics or future life outcomes, with good news receiving more weight than bad news. I examine information processing across a broad set of contexts: (1) ego relevant, (2) financially relevant, and (3) non value relevant. In the first two cases, information about outcomes is valenced, containing either good or bad news. In the third case, information is value neutral. In contrast to a number of previous studies I do not find differences in belief updating across valenced and value neutral settings. Updating across all contexts is asymmetric and conservative: the former is influenced by sequences of signals received, a new variation of confirmation bias, while the latter is driven by non-updates. Despite this, posteriors are well approximated by those calculated using Bayes’ rule. Most importantly these patterns are present across all contexts, cautioning against the interpretation of asymmetric updating or other deviations from Bayes’ rule as being motivated by psychological biases.

Original languageEnglish
Pages (from-to)369-395
Number of pages27
JournalExperimental Economics
Volume22
Issue number2
DOIs
Publication statusPublished - 15 Jun 2019

Keywords

  • Asymmetric belief updating
  • Bayes’ rule
  • Beliefs
  • Conservatism
  • Overconfidence

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