TI Complexity in Economics Seminars

Peiran Jiao (Maastricht University)
Wednesday, 11 October 2017

Heterogeneous beliefs often arise among people who have the same information but different payoff experiences. This paper proposes an explanation in which the experience of realized payoffs distort beliefs: gains lead an agent to underweight negative signals about future outcomes and thus to become overoptimistic, whereas losses do the opposite. I experimentally test the model, and find behaviors consistent with its predictions in a design where experienced payoffs carried no informational value for Bayesian updating. The proposed mechanism is distinct from reinforcement learning, confirmation bias, and attention-based explanations.