Belief updating beyond the two-state setting

Management Science, accepted for publication

87 Pages Posted: 13 Jul 2020 Last revised: 12 Jun 2023

See all articles by Hannes Mohrschladt

Hannes Mohrschladt

University of Muenster - Finance Center

Maren Baars

University of Muenster - Finance Center

Thomas Langer

University of Muenster - Finance Center

Date Written: June 12, 2023

Abstract

Heuristics and biases in probabilistic belief updating have typically been examined in simple two-state experimental settings. We argue that the two-state setting has probabilistic properties that do not extend to settings with more states. With three states, we find that individuals apply similar heuristics, such as representativeness and anchoring, when providing posterior probability distributions. However, due to the different normative benchmark, the use of these heuristics results in different biases for point estimates. In particular, we demonstrate that the well-known finding of stronger underinference for larger signal sets does not translate from the two-state to the three-state setting. Our findings caution against an indiscriminate transfer of updating biases observed in two-state settings to a broad set of real-world applications.

Keywords: Two-state setting, information weight, over- and underinference

JEL Classification: C91, D91

Suggested Citation

Mohrschladt, Hannes and Baars, Maren and Langer, Thomas, Belief updating beyond the two-state setting (June 12, 2023). Management Science, accepted for publication, Available at SSRN: https://ssrn.com/abstract=3631011 or http://dx.doi.org/10.2139/ssrn.3631011

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

Maren Baars

University of Muenster - Finance Center ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

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