 A Model of Reference-Dependent Belief UpdatingJohannes Maier and Clemens König No 6156, CESifo Working Paper Series from CESifo Abstract: We propose a model of instrumental belief choice under loss aversion. When new information arrives, an agent is prompted to abandon her prior. However, potential posteriors may induce her to take actions that generate a lower utility in some states than actions induced by her prior. These losses loom larger than gains in other states in which potential posteriors lead to larger utility than the prior. In choosing her belief, the agent optimally trades off these psychological gains and losses against the belief's objective performance. Consistent with empirical evidence, belief updating in this model is conservative and can be asymmetric, so that bad news is updated more conservatively than good news. These updating biases generate prior-dependent information preferences, such that agents may avoid information when being unconfident but are information seeking otherwise. Because belief updating depends on the decision problem in which new information is going to be used, the model allows us to explore how these predictions change with either individual preferences or the choice context. Keywords: belief choice; non-Bayesian updating; reference dependence; loss aversion; regret; conservatism; signal valence; information preferences; overconfidence (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6156 Access Statistics for this paper More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC. |
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