Trust in Signals and the Origins of Disagreement
84 Pages Posted: 4 Nov 2016 Last revised: 31 Mar 2019
Date Written: March 28, 2019
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: Suggested Citation