Expectation Formation under Uninformative Signals

57 Pages Posted: 28 Nov 2021

See all articles by Pascal Kieren

Pascal Kieren

University of Mannheim

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: August 3, 2020

Abstract

How do individuals process non-diagnostic information? According to Bayes’ Theorem, signals which do not carry relevant information about the objective state of the world are treated as if no signal occurred. This paper provides experimental evidence that individuals update their expectations even after observing uninformative signals. Importantly, the direction in which they update depends on the valence of the signal. Prior beliefs become more optimistic after desirable uninformative signals and more pessimistic after undesirable uninformative signals. Our results provide novel insights why individuals form and entertain false beliefs in environments where potentially new information is easily accessible but costly to verify (e.g. online media).

Keywords: Belief Formation, Information Processing, Uninformative Signals, Bayes' Theorem, Misattribution

JEL Classification: C91, D12, D81, D83, D91

Suggested Citation

Kieren, Pascal and Weber, Martin, Expectation Formation under Uninformative Signals (August 3, 2020). Available at SSRN: https://ssrn.com/abstract=3971733 or http://dx.doi.org/10.2139/ssrn.3971733

Pascal Kieren (Contact Author)

University of Mannheim ( email )

Deparment of Finance, L9, 1-2
Mannheim, 68131
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
31
Abstract Views
322
PlumX Metrics