Essays on belief formation
- This dissertation comprises three chapters that study the role of bounded rationality and psychological mechanisms in the formation of subjective beliefs using experimental methods. The first chapter studies belief updating biases — under- and overreaction to new information. Evidence from experiments, surveys, and the field has uncovered both underreaction and overreaction to new information. We provide new experimental evidence on the underlying mechanisms of under- and overreaction by comparing how people make inferences and revise forecasts in the same information environment. Participants underreact to signals when inferring about underlying states, but overreact to the same signals when revising forecasts about future outcomes — a phenomenon we term "the inference-forecast gap." We show that this gap is largely driven by different simplifying heuristics used in the two tasks, and we provide evidence supporting both similarity and timing as plausible mechanisms. The second chapter explores the role of motivated reasoning in the bias of correlation neglect in belief formation. Experimental participants receive potentially redundant signals about either an ego-relevant state — their IQ test performance — or an ego-irrelevant state. A simple hypothesis based on motivated reasoning predicts asymmetric updating about signal redundancy and about the focal state only in the treatment with ego-relevance. We find qualified support for our hypothesis: participants generally underappreciate the extent to which identical signals are more likely to come from the same source (and thus contain redundant information), but the bias is significantly stronger for ego-favorable signals than for ego-unfavorable signals. This asymmetric effect disappears in the treatment where the focal state is ego-irrelevant. These results suggest that individuals may neglect the correlation between desirable signals to sustain motivated beliefs. However, the asymmetric updating effect on signal redundancy is not quantitatively large enough to generate significant asymmetric updating about the ego-relevant state (own IQ test performance). The third chapter studies the formation of misspecified mental models. Using a novel experimental approach that directly elicits individuals' mental models, we show that making choices can lead individuals to adopt models that exaggerate the importance of their choice variable for payoff-relevant outcomes. In other words, one key factor in the economic environment — the endowed ability to choose the value of a variable — can cause agents to form models that feature an outsized effect of that variable. We refer to the resulting belief distortions as choice-induced model distortions, which shed light on the formation of a large class of empirically observed misspecified models. We discuss the potential psychological mechanisms and economic consequences of choice-induced misspecified models.
|Type of resource
|electronic resource; remote; computer; online resource
|1 online resource.
|Bernheim, B. Douglas
|Bernheim, B. Douglas
|Degree committee member
|Stanford University, School of Humanities and Sciences
|Stanford University, Department of Economics
|Statement of responsibility
|Tony Qiaofeng Fan.
|Submitted to the Department of Economics.
|Thesis Ph.D. Stanford University 2023.
- © 2023 by Qiaofeng Fan
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