54 Pages Posted: 23 Dec 2018 Last revised: 12 Mar 2019
Date Written: March 8, 2019
We use a novel experimental design to study how players update their beliefs about the beliefs of others. We find that higher-order beliefs respond to information about how lower-order beliefs are formed and are updated more slowly when a player faces uncertainty about others' information. We also identify a novel behavioral bias: Higher-order beliefs become less accurate over time, even as more information becomes available. We argue that this is driven by a failure of theory of mind, i.e., a failure of players to correctly predict the way in which others form beliefs.
Keywords: Higher-order beliefs, learning, theory of mind
JEL Classification: C90, D83, D89
Suggested Citation: Suggested Citation