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Belief formation and belief updating under ambiguity: Evidence from experiments

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  • Li, Wenhui
  • Wilde, Christian

Abstract

This paper investigates beliefs in an ambiguous environment. In contrast to many previous studies, the beliefs regarding possible scenarios are measured independently from attitudes. We use laboratory experiments to estimate the entire distribution of subjective beliefs and examine how beliefs are updated, incorporating new information. We find that beliefs and updating rules are quite heterogeneous. For most subjects, we can reject the objective equality hypothesis that beliefs are uniformly distributed. The unbiased belief hypothesis cannot be rejected overall; Most subjects display no bias towards pessimism/optimism in beliefs. The Bayesian updating hypothesis can be rejected; Most subjects under-adjust beliefs in response to new information. Finally, we find that subjects adjust their beliefs symmetrically to good news and to bad news.

Suggested Citation

  • Li, Wenhui & Wilde, Christian, 2020. "Belief formation and belief updating under ambiguity: Evidence from experiments," SAFE Working Paper Series 251, Leibniz Institute for Financial Research SAFE, revised 2020.
    • Handle: RePEc:zbw:safewp:251
    DOI: 10.2139/ssrn.3399983
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    Cited by:

    1. Li, Wenhui & Ockenfels, Peter & Wilde, Christian, 2021. "The effect of ambiguity on price formation and trading behavior in financial markets," SAFE Working Paper Series 326, Leibniz Institute for Financial Research SAFE.
    2. Li, Wenhui & Wilde, Christian, 2021. "Separating the effects of beliefs and attitudes on pricing under ambiguity," SAFE Working Paper Series 311, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    ambiguity; belief distribution; belief updates; learning strategy; Bayes' rule; laboratory experiments;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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