Extrapolative Beliefs in Perceptual and Economic Decisions: Evidence of a Common Mechanism

Cary Frydman () and Gideon Nave ()
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Cary Frydman: Finance and Business Economics Department, Marshall School of Business, University of Southern California, Los Angeles, California 90089
Gideon Nave: Marketing Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Management Science, 2017, vol. 63, issue 7, 2340-2352

Abstract: A critical component of both economic and perceptual decision making under uncertainty is the belief-formation process. However, most research has studied belief formation in economic and perceptual decision making in isolation. One reason for this separate treatment may be the assumption that there are distinct psychological mechanisms that underlie belief formation in economic and perceptual decisions. An alternative theory is that there exists a common mechanism that governs belief formation in both domains. Here, we test this alternative theory by combining a novel computational modeling technique with two well-known experimental paradigms. We estimate a drift-diffusion model (DDM) and provide an analytical method to decode prior beliefs from DDM parameters. Subjects in our experiment exhibit strong extrapolative beliefs in both paradigms. In line with the common mechanism hypothesis, we find that a single computational model explains belief formation in both tasks and that individual differences in belief formation are correlated across tasks.

Keywords: extrapolative beliefs; response times; belief updating; sequential effects; hot-hand fallacy; judgment biases; drift-diffusion model (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (8)

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