The Perils of Overreaction

Konstantin von Beringe and Mark Whitmeyer

Papers from arXiv.org

Abstract: In order to study updating rules, we consider the problem of a malevolent principal screening an imperfectly Bayesian agent. We uncover a fundamental dichotomy between underreaction and overreaction to information. If an agent's posterior is farther away from the prior than it should be under Bayes' law, she can always be exploited by the principal to an unfettered degree: the agent's ex ante expected loss can be made arbitrarily large. In stark contrast, an agent who underreacts (whose posterior is closer to the prior than the Bayesian posterior) cannot be exploited at all.

Date: 2024-05
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2405.08087 Latest version (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:arx:papers:2405.08087

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().