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Non-Bayesian Learning

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  • Epstein Larry G

    ()
    (Boston University)

  • Noor Jawwad

    ()
    (Boston University)

  • Sandroni Alvaro

    ()
    (University of Pennsylvania)

Abstract

A series of experiments suggest that, compared to the Bayesian benchmark, people may either underreact or overreact to new information. We consider a setting where agents repeatedly process new data. Our main result shows a basic distinction between the long-run beliefs of agents who underreact to information and agents who overreact to information. Like Bayesian learners, non-Bayesian updaters who underreact to observations eventually forecast accurately. Hence, underreaction may be a transient phenomenon. Non-Bayesian updaters who overreact to observations eventually forecast accurately with positive probability but may also, with positive probability, converge to incorrect forecasts. Hence, overreaction may have long-run consequences.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 10 (2010)
Issue (Month): 1 (January)
Pages: 1-20

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Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:3

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Cited by:
  1. Qiu, Jianying & Weitzel, Utz, 2013. "Experimental Evidence on Valuation and Learning with Multiple Priors," MPRA Paper 43974, University Library of Munich, Germany.
  2. Vilen Lipatov, 2014. "Compliance Dynamics Generated by Social Interaction Rules," CESifo Working Paper Series 4767, CESifo Group Munich.
  3. Alexander Ludwig & Alexander Zimper, 2012. "A decision-theoretic model of asset-price underreaction and overreaction to dividend news," Working Papers 201223, University of Pretoria, Department of Economics.
  4. F├╝llbrunn, Sascha & Rau, Holger & Weitzel, Utz, 2013. "Do ambiguity effects survive in experimental asset markets?," MPRA Paper 44700, University Library of Munich, Germany.
  5. Ali Jadbabaie & Pooya Molavi & Alvaro Sandroni & Alireza Tahbaz-Salehi, 2009. "Non-Bayesian Social Learning, Third Version," PIER Working Paper Archive 11-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Aug 2011.
  6. Iuliia Brushko, 2013. "Financial Signaling and Earnings Forecasts," CERGE-EI Working Papers wp498, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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