Payoff-Based Belief Distortion

66 Pages Posted: 9 May 2017  

Peiran Jiao

University of Oxford - Nuffield College

Date Written: February 15, 2017

Abstract

Heterogeneous beliefs often arise among people who have the same information but different payoff experiences. This paper proposes an explanation in which the experience of realized payoffs distort beliefs: gains lead an agent to underweight negative signals about future outcomes and thus to become overoptimistic, whereas losses do the opposite. I experimentally test the model, and find behaviors consistent with its predictions in a design where experienced payoffs carried no informational value for Bayesian updating. The proposed mechanism is distinct from reinforcement learning, confirmation bias, and attention-based explanations.

Keywords: Experienced Payoff, Reinforcement, Belief Distortion

JEL Classification: D03, D81, D83, C91

Suggested Citation

Jiao, Peiran, Payoff-Based Belief Distortion (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2964289 or http://dx.doi.org/10.2139/ssrn.2964289

Peiran Jiao (Contact Author)

University of Oxford - Nuffield College ( email )

New Road
Oxford, OX1 1NF
United Kingdom

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