Bayesian Reasoning: Evidence from the Field
65 Pages Posted: 6 Apr 2016 Last revised: 10 Aug 2017
Date Written: March 1, 2016
We conduct a field test of Bayesian reasoning, examining whether agents form expectations by placing a larger weight on cues that are more informative with lower process variance. To test this notion we analyse subjective probabilities inferred from odds on the outcomes of tennis matches, exploiting exogenous variation in process variance related to the format with which tennis matches are played. Our results are consistent with “process variance neglect”, i.e., agents are not adjusting their ex-ante probabilities sufficiently according to process variance, and thus violate Bayes Rule. This result is robust to inferring subjective probabilities from odds offered by professional bookmakers or odds achieved on a person-to-person betting exchange. The resulting biases in expectations are costly.
Keywords: Bayes Rule, Behavioural Biases, Field Experiments
JEL Classification: D8, G1
Suggested Citation: Suggested Citation