Attitude Polarization
23 Pages Posted: 6 Aug 2009
Date Written: November 7, 2007
Abstract
Psychological evidence suggests that people's learning behavior is often prone to a 'myside bias' or 'irrational belief persistence' in contrast to learning behavior exclusively based on objective data. In the context of Bayesian learning such a bias may result in diverging posterior beliefs and attitude polarization even if agents receive identical information. Such patterns cannot be explained by the standard model of rational Bayesian learning that implies convergent beliefs. As our key contribution, we therefore develop formal models of Bayesian learning with psychological bias as alternatives to rational Bayesian learning. We derive conditions under which beliefs may diverge in the learning process and thus conform with the psychological evidence. Key to our approach is the assumption of ambiguous beliefs that are formalized as non-additive probability measures arising in Choquet expected utility theory. As a speciffc feature of our approach, our models of Bayesian learning with psychological bias reduce to rational Bayesian learning in the absence of ambiguity.
Keywords: Non-additive Probability Measures, Choquet Expected Utility Theory, Bayesian Learning, Bounded Rationality
JEL Classification: C79, D83
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Mean Reversion in Equilibrium Asset Prices
By Stephen G. Cecchetti, Pok-sang Lam, ...
-
Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?
By Stephen G. Cecchetti, Pok-sang Lam, ...
-
Ratings Migration and the Business Cycle, with Application to Credit Portfolio Stress Testing
By Anil Bangia, Francis X. Diebold, ...
-
An Exploration of the Effects of Pessimism and Doubt on Asset Returns
-
An Exploration of the Effects of Pessimism and Doubt on Asset Returns
-
Equilibrium Stock Return Dynamics Under Alternative Rules of Learning About Hidden States
By Michael W. Brandt, Qi Zeng, ...
-
Heterogeneous Beliefs and Asset Pricing in Discrete Time: An Analysis of Pessimism and Doubt
By Clotilde Napp and Elyes Jouini