Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments

47 Pages Posted: 7 Jun 2019 Last revised: 18 Apr 2021

See all articles by Wenhui Li

Wenhui Li

SAFE Goethe University Frankfurt

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: April 2, 2021

Abstract

This paper investigates beliefs in an ambiguous environment. In contrast to many previous studies, the beliefs regarding possible scenarios are measured independently from attitudes. We use laboratory experiments to estimate the entire distribution of subjective beliefs and examine how beliefs are updated, incorporating new information. We find that beliefs and updating rules are quite heterogeneous. For most subjects, we can reject the objective equality hypothesis that beliefs are uniformly distributed. The unbiased belief hypothesis cannot be rejected overall; most subjects display no bias towards pessimism/optimism in beliefs. The Bayesian updating hypothesis can be rejected; most subjects under-adjust beliefs in response to new information. Finally, we find that subjects adjust their beliefs symmetrically to good news and to bad news.

Keywords: ambiguity, belief distribution, belief updates, learning strategy, Bayes' rule, laboratory experiments

JEL Classification: D81, D83

Suggested Citation

Li, Wenhui and Wilde, Christian, Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments (April 2, 2021). SAFE Working Paper No. 251 , Available at SSRN: https://ssrn.com/abstract=3399983 or http://dx.doi.org/10.2139/ssrn.3399983

Wenhui Li

SAFE Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt
Germany

Christian Wilde (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

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