The Generalized Euler Equation and the Bankruptcy-Sovereign Default Problem

J. Aislinn Bohren () and Daniel N. Hauser ()
Additional contact information
J. Aislinn Bohren: University of Pennsylvania
Daniel N. Hauser: University School of Business and Helsinki

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We develop a flexible model of confirmation bias, in which individuals misinterpret signals as stronger evidence for the state favored by their prior than they actually are. The bias varies with the agent's current belief, nesting Rabin and Schrag (1999) as a special case. In an individual learning setting, incorrect learning arises with positive probability when the bias is severe, generalizing existing work. By contrast, in a social learning setting, correct learning obtains almost surely regardless of the severity of bias. Whereas social information typically introduces inefficiencies, here it mitigates them: social interaction overcomes bias that would otherwise generate incorrect learning.Length: 25 pages

Keywords: confirmation bias; biased belief updating; non-Bayesian updating; social learning; model misspecification (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economics.sas.upenn.edu/system/files/worki ... per%20Submission.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:26-010

Access Statistics for this paper

More papers in PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 133 South 36th Street, Philadelphia, PA 19104. Contact information at EDIRC.
Bibliographic data for series maintained by Administrator ().