Payoff-Based Belief Distortion
66 Pages Posted: 9 May 2017
Date Written: February 15, 2017
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: Suggested Citation