Strategically biased learning in market interactions

Giulio Bottazzi and Daniele Giachini

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: We consider a market economy where two rational agents are able to learn the distribution of future events. In this context, we study whether moving away from the standard Bayesian belief updating, in the sense of under-reaction to some degree to new information, may be strategically convenient for traders. We show that, in equilibrium, strong under-reaction occurs, thus rational agents may strategically want to bias their learning process. Our analysis points out that the underlying mechanism driving ex-ante strategical decisions is diversity seeking. Finally, we show that, even if robust with respect to strategy selection, strong under-reaction can generate low realized welfare levels because of a long transient phase in which the agent makes poor predictions.

Keywords: Learning; Strategic interaction; Behavioral Bias; Financial Markets. (search for similar items in EconPapers)
Date: 2022-01-15
New Economics Papers: this item is included in nep-cwa, nep-gth, nep-mic and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: STRATEGICALLY BIASED LEARNING IN MARKET INTERACTIONS (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2022/02

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