Extrapolative Beliefs in Perceptual and Economic Decisions: Evidence of a Common Mechanism

Management Science, Forthcoming

39 Pages Posted: 16 Jan 2016

See all articles by Cary Frydman

Cary Frydman

University of Southern California - Marshall School of Business

Gideon Nave

University of Pennsylvania - The Wharton School

Date Written: January 14, 2016

Abstract

A critical component of both economic and perceptual decision-making under uncertainty is the belief formation process. However, most research has studied belief formation in economic and perceptual decision-making in isolation. One reason for this separate treatment may be the assumption that there are distinct psychological mechanisms that underlie belief formation in economic and perceptual decisions. An alternative theory is that there exists a common mechanism that governs belief formation in both domains. Here, we test this alternative theory by combining a novel computational modeling technique with two well-known experimental paradigms. We estimate a drift-diffusion model (DDM) and provide an analytical method to decode prior beliefs from DDM parameters. Subjects in our experiment exhibit strong extrapolative beliefs in both paradigms. In line with the common mechanism hypothesis, we find that a single computational model explains belief formation in both tasks, and that individual differences in belief formation are correlated across tasks.

Keywords: extrapolative beliefs, hot hand fallacy, drift-diffusion model, response times

JEL Classification: G11, C91

Suggested Citation

Frydman, Cary and Nave, Gideon, Extrapolative Beliefs in Perceptual and Economic Decisions: Evidence of a Common Mechanism (January 14, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2715833

Cary Frydman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Gideon Nave

University of Pennsylvania - The Wharton School ( email )

3730 Walnut St
JMHH Suite 700
Philadelphia, PA 19104-6365
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
177
Abstract Views
1,094
rank
182,228
PlumX Metrics