When Beliefs Influence the Perceived Signal Precision: The Impact of News on Reinforcement-Oriented Agents

Stefanie Schraeder ()
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Stefanie Schraeder: Department of Finance, University of Vienna, 1090 Vienna, Austria

Management Science, 2024, vol. 70, issue 8, 5517-5539

Abstract: In a world of increasingly extensive information, rational investors can make better decisions. However, reinforcement-oriented investors are also more likely to observe preferred signals close to their own perception. A focus on these signals distorts the perceived aggregate signal in the direction of the prior estimate. This reduces belief adaptation. Hence, the empirically well-documented selective exposure/reinforcement theory reduces the positive impact of greater information availability on price efficiency. Additional information can sometimes even decrease perception correctness. In a market with biased investors, managers have an incentive to announce more diffuse (fewer precise) signals in case of negative (positive) information. This results in postearnings-announcement drift and dispersion anomaly. Also, the distribution shape matters for information processing. For unimodal, symmetric distributions, agents’ perceptions converge to the fundamental—even though at a reduced speed. For multimodal signal distributions, the estimate can diverge from the fundamental.

Keywords: reinforcement theory; selective exposure; confirmation bias; signal processing; behavioral finance; postearnings-announcement drift; financial anomalies (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:8:p:5517-5539

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