Belief Formation and Belief Updating Under Ambiguity: Evidence from Experiments

48 Pages Posted: 7 Jun 2019 Last revised: 21 Aug 2020

See all articles by Wenhui Li

Wenhui Li

SAFE Goethe University Frankfurt

Christian Wilde

Goethe University Frankfurt - Department of Finance

Date Written: August 13, 2020

Abstract

Decisions under ambiguity depend on the beliefs regarding possible scenarios and the attitude towards ambiguity. This paper exclusively focuses on beliefs, and beliefs are measured independently from attitudes, in contrast to many previous studies. We use laboratory experiments to estimate the subjective belief formation and belief updating process in an ambiguous environment. As a main contribution, we recover the entire be- lief distribution of individual subjects and scrutinize how beliefs are updated in response to new information. For 70% of the subjects, we can reject the objective equality hypothe- sis that one’s initial prior follows a uniform distribution. A further investigation of biases in initial beliefs reveals that 66% of the subjects display neither pessimism nor optimism in initial beliefs. Overall, the unbiased belief hypothesis cannot be rejected. The recovered belief updating rules reveal that the Bayesian updating hypothesis can be rejected for 84% of the subjects. Among them, most subjects under-react to new information compared to what Bayes’ rule implies. Finally, we find that beliefs are heterogeneous and cannot be characterized by a single distribution that fits for all subjects.

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 (August 13, 2020). 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 )

Grüneburgplatz 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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