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Paying is believing: The effect of costly information on Bayesian updating

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  • Robalo, Pedro
  • Sayag, Rei

Abstract

The difficulties posed by Bayesian updating are recognized across many domains. In this paper we explore whether individual belief updating is affected by the cost of information. Our conjecture is that this effect should be observed if individuals are prone to the sunk cost fallacy. We design an experimental environment where subjects perform a belief updating task after receiving useful and identical information on the state of the world. Our treatments vary the way in which information is made available to subjects. We find a systematic effect of the cost of information on belief updating. Subjects overweigh costly information relative to free information, which results in a ‘push’ of beliefs towards the extremes. The cost-driven shift can lead to posterior beliefs more attuned with Bayesian updating. We argue that an intensification of the representativeness bias is the most likely explanation of our results.

Suggested Citation

  • Robalo, Pedro & Sayag, Rei, 2018. "Paying is believing: The effect of costly information on Bayesian updating," Journal of Economic Behavior & Organization, Elsevier, vol. 156(C), pages 114-125.
  • Handle: RePEc:eee:jeborg:v:156:y:2018:i:c:p:114-125
    DOI: 10.1016/j.jebo.2018.09.016
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    2. Priyodorshi Banerjee & S. Chandrasekhar & P. Srikant, 2019. "Persistent Sunk Cost Fallacy in a Real Effort Experiment," Studies in Microeconomics, , vol. 7(1), pages 161-172, June.

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    More about this item

    Keywords

    Information; Bayesian updating; Decision making under risk; Sunk cost; Heuristics and biases;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • 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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