Payoff-Based Belief Distortion

Peiran Jiao

The Economic Journal, 2020, vol. 130, issue 629, 1416-1444

Abstract: Heterogeneous beliefs often arise among people with the same information but different personally experienced payoffs. To explain this, I propose a mechanism in which experienced payoffs distort beliefs: gains lead an agent to relatively underweight negative new signals and thus to become overoptimistic, whereas losses do the opposite. I experimentally test this mechanism and find behaviour consistent with its predictions. The experiment created a setting where payoffs carried no informational value for Bayesian updating, and thus offered a strong test for the effect of payoffs on beliefs. The findings were robust, and distinct from alternative mechanisms in important ways.

Date: 2020
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