Biases in Belief Updating Within and Across Domains

Francesca Bastianello and Alex Imas

No 34638, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Why do people sometimes overreact to new information and other times underreact? We develop a model in which the strength of a signal—how much one should update their beliefs with new information—depends on multiple features of the information environment. Limited attention to these features leads to misperceptions of signal strength: people approach a problem with an experience-based prior, which they adjust only partially based on how much attention they pay to different features. This mechanism explains a wide range of belief-updating patterns. Insensitivity to a single feature generates underreaction to strong and overreaction to weak signals, and more neglected features amplify this. Insensitivity to multiple features can instead break that pattern: insensitivity to one feature can generate excess sensitivity with respect to another, leading to overreaction to both weak and strong signals. A series of experiments provides support for the model and its underlying mechanism.

JEL-codes: D01 D83 D9 D91 G02 G4 G41 (search for similar items in EconPapers)
Date: 2026-01
Note: AP
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