Hey, what did you expect ? Confirmation bias in credence goods markets: Theoretical and experimental analyses

This study investigates how consumer confirmation bias affects expert decision-making in credence goods markets by combining theoretical modeling with experimental analysis. Using psychological game theory, we develop a dynamic two-player model in which an expert's utility is shaped by both financial incentives and the psychological disutility associated with not meeting consumer expectations. The model predicts that experts with higher psychological sensitivity are more likely to deviate from profit-maximizing strategies to align with consumer beliefs, potentially increasing market inefficiencies. Experimental results show that the extent to which confirmation bias influences expert behavior depends on both the expert's sensitivity and state of the world. Under conditions of high sensitivity and consumer bias, experts adjusted their recommendations to match consumer expectations, even when doing so led to suboptimal outcomes. These findings have policy implications and contribute to the literature on credence goods by highlighting the tension between expert judgment and consumer-driven expectations.