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Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence

Timo Henckel (), Gordon Menzies, Peter Moffat and Daniel Zizzo
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Peter Moffat: School of Economics, University of East Anglia

No 40, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: Given a lack of perfect knowledge about the future, agents need to form expectations about variables a?ecting their decisions. We present an experiment where subjects sequentially receive signals about the true state of the world and need to form beliefs about which one is true, with payo?s related to reported beliefs. We control for risk aversion using the O?erman et al. (2009) technique. Against the baseline of Bayesian updating, we test for belief adjustment under-reaction and over-reaction and model the decision making process of the agent as a double hurdle model where agents ?rst decide whether to adjust their beliefs and, if so, then decide by how much. We ?nd evidence for sticky belief adjustment. This is due to a combination of: random belief adjustment; state-dependent belief adjustment, with many subjects requiring considerable evidence to change their beliefs; and Quasi-Bayesian belief adjustment, with insu?cient belief adjustment when a belief change does occur.

Keywords: belief revision; double hurdle model; expectations; overreaction; underreaction (search for similar items in EconPapers)
JEL-codes: C34 C91 D03 D84 E03 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-04-07
New Economics Papers: this item is included in nep-exp, nep-hpe and nep-upt
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