Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments

60 Pages Posted: 7 Jun 2019 Last revised: 10 Oct 2019

See all articles by Wenhui Li

Wenhui Li

SAFE Goethe University Frankfurt

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: September 21, 2019

Abstract

Decisions under ambiguity depend on both the belief regarding possible scenarios and the attitude towards ambiguity. This paper exclusively focuses on beliefs, measured independent from attitudes. We use laboratory experiments to elicit the subjective belief formation and belief updating process in an ambiguous environment. As a main contribution, we elicit the entire belief distribution of individual subjects. For almost half of the subjects, we can reject the objective equality hypothesis that one's initial prior follows a uniform distribution. The results also show that, when updating beliefs, more than half of the subjects closely follow the Bayes rule. The rest significantly deviate from Bayes. An investigation of a possible bias in beliefs reveals that subjects' beliefs are mostly neutral and do not display pessimism or optimism.

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

Suggested Citation

Li, Wenhui and Wilde, Christian, Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments (September 21, 2019). 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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