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The Good News-Bad News Effect: Asymmetric Processing of Objective Information about Yourself

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  • David Eil
  • Justin M. Rao

Abstract

We study processing and acquisition of objective information regarding qualities that people care about, intelligence and beauty. Subjects receiving negative feedback did not respect the strength of these signals, were far less predictable in their updating behavior and exhibited an aversion to new information. In response to good news, inference conformed more closely to Bayes' Rule, both in accuracy and precision. Signal direction did not affect updating or acquisition in our neutral control. Unlike past work, our design varied direction and agreement with priors independently. The results indicate that confirmation bias is driven by direction; confirmation alone had no effect. (JEL D82, D83)

Suggested Citation

  • David Eil & Justin M. Rao, 2011. "The Good News-Bad News Effect: Asymmetric Processing of Objective Information about Yourself," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 114-138, May.
  • Handle: RePEc:aea:aejmic:v:3:y:2011:i:2:p:114-38 Note: DOI: 10.1257/mic.3.2.114
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    References listed on IDEAS

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    1. Linda Babcock & Xianghong Wang & George Loewenstein, 1996. "Choosing the Wrong Pond: Social Comparisons in Negotiations That Reflect a Self-Serving Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 1-19.
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    3. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 537-557.
    4. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, pages 109-126.
    5. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, pages 307-319.
    6. Kyle Chauvin & David Laibson & Johanna Mollerstrom, 2011. "Asset Bubbles and the Cost of Economic Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 233-260, August.
    7. Raymond Fisman & Sheena S. Iyengar & Emir Kamenica & Itamar Simonson, 2006. "Gender Differences in Mate Selection: Evidence From a Speed Dating Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 673-697.
    8. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, pages 306-318.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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