Belief Updating and the Demand for Information

82 Pages Posted: 3 Jul 2014  

Sandro Ambuehl

University of Toronto - Joseph L. Rotman School of Management - Business Economics; University of Toronto at Scarborough - Division of Management

Shengwu Li

Stanford University - Department of Economics

Date Written: June 27, 2014

Abstract

How do individuals value noisy information that guides economic decisions? Using a novel laboratory experiment, we investigate the willingness-to-pay for useful information. We identify two systematic biases in information demand. Compared to the standard rational agent model, individuals over-value low quality information and under-value high quality information. They also disproportionately prefer information that may yield certainty. By eliciting agents’ posterior beliefs, we find that both these biases are well-explained by non-Bayesian belief updating. Furthermore, individuals differ consistently in their responsiveness to information - the extent that their beliefs move upon observing signals. This single trait explains about 80% of the variation in information demand that is attributable to belief updating. It is also predictive of behavior across different choice environments. Thus, we find that the demand for information is driven by belief updating, and that belief updating behavior is a stable individual trait.

Keywords: Belief Updating, Experiment, Demand for Information

JEL Classification: D01, D03, D81, D83

Suggested Citation

Ambuehl, Sandro and Li, Shengwu, Belief Updating and the Demand for Information (June 27, 2014). Available at SSRN: https://ssrn.com/abstract=2461904 or http://dx.doi.org/10.2139/ssrn.2461904

Sandro Ambuehl

University of Toronto - Joseph L. Rotman School of Management - Business Economics ( email )

Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://https://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Ambuehl

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

Shengwu Li (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

HOME PAGE: http://www.stanford.edu/~shengwu/

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