Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments

56 Pages Posted: 7 Jun 2019

See all articles by Christian Wilde

Christian Wilde

Goethe University Frankfurt - Department of Finance

Wenhui Li

SAFE Goethe University Frankfurt

Date Written: June 2, 2019

Abstract

Decisions under ambiguity depend on both the belief regarding possible scenarios and the attitude towards ambiguity. This paper exclusively investigates the belief formation and belief updating process under ambiguity, using laboratory experiments. The results show that half of the subjects tend to adopt a simple heuristic strategy when updating beliefs, while the other half seems to partially adopt the Bayesian updates. We recover beliefs, represented by distributions of the priors/posteriors. The recoverable initial priors mostly follow a uniform distribution. We also find that subjects on average demonstrate slight pessimism in an ambiguous environment.

Keywords: ambiguity, learning strategy, belief updates, non-Bayesian updates, pessimism, laboratory experiments

Suggested Citation

Wilde, Christian and Li, Wenhui, Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments (June 2, 2019). SAFE Working Paper No. 251 (2019). Available at SSRN: https://ssrn.com/abstract=3399983 or http://dx.doi.org/10.2139/ssrn.3399983

Christian Wilde (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

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

Wenhui Li

SAFE Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt
Germany

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