Expectation Formation Under Uninformative Signals

Pascal Kieren () and Martin Weber ()
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Pascal Kieren: Alfred-Weber-Institute for Economics, Heidelberg University, 69115 Heidelberg, Germany
Martin Weber: Department of Finance, University of Mannheim, 68161 Mannheim, Germany; and Centre for Economic Policy Research, London EC1V 0DX, United Kingdom

Management Science, 2025, vol. 71, issue 6, 5123-5141

Abstract: How do individuals process nondiagnostic information? According to Bayes’ theorem, signals that do not carry relevant information are treated as if no signal occurred. This paper provides evidence that individuals update their expectations even after observing uninformative signals. Importantly, the direction in which they update depends on the valence of the signal. Prior beliefs become more optimistic after desirable uninformative signals and more pessimistic after undesirable uninformative signals. Our results provide novel insights why individuals form and entertain false beliefs in environments in which potentially new information is easily accessible but costly to verify (e.g., online media).

Keywords: belief formation; information processing; uninformative signals; Bayes’ theorem (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:6:p:5123-5141

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