Trust in Signals and the Origins of Disagreement

84 Pages Posted: 4 Nov 2016 Last revised: 31 Mar 2019

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

Alice Hsiaw

Brandeis University - International Business School

Date Written: March 28, 2019

Abstract

Why do individuals interpret the same information differently? We propose that individuals follow Bayes' Rule when forming posteriors with one exception: when assessing the credibility of signal sources, they "double-dip" the data and use already-updated beliefs instead of their priors. Individuals who make this mistake either over- or underreact to new information depending on the order in which they received previous signals. Traders engage in excessive speculation associated with rapid price changes, bubbles, and endogenous crashes. Our model provides a theory of the origins of disagreement: individuals disagree about both unknown states and credibility despite sharing common priors and information.

Keywords: disagreement, trust, polarization, learning, expectations, experts

JEL Classification: G41, G40, D83, D84, D91

Suggested Citation

Cheng, Ing-Haw and Hsiaw, Alice, Trust in Signals and the Origins of Disagreement (March 28, 2019). Tuck School of Business Working Paper No. 2864563. Available at SSRN: https://ssrn.com/abstract=2864563 or http://dx.doi.org/10.2139/ssrn.2864563

Ing-Haw Cheng (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Alice Hsiaw

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

HOME PAGE: http://people.brandeis.edu/~ahsiaw/

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