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Good news and bad news are still news: Experimental evidence on belief updating

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  • Alexander Coutts

Abstract

Bayesian updating remains the benchmark for dynamic modeling under uncertainty within economics. Recent theory and evidence suggest individuals may process information in a biased manner when it relates to personal characteristics or future life outcomes. Specifically, updating has been found to be symmetric, with good news receiving more weight than bad news. I put this theory and evidence to the test, by examining information processing across multiple contexts with varying stake conditions. I do not find that good news is over-weighted relative to bad news, but in fact, I find the opposite asymmetry. However these updating patterns are present more generally, including when news is neither good nor bad. While updating across all context and stake conditions is asymmetric and conservative, posteriors remain well approximated by those calculated using Bayes’ rule. I investigate further possible determinants of asymmetry and conservatism, finding that the former is sensitive to signal types and the latter is driven solely by non-updates. Most importantly these patterns are present across all contexts, cautioning against the interpretation of asymmetric updating or other deviations from Bayes’ rule as being motivated by psychological biases.

Suggested Citation

  • Alexander Coutts, 2017. "Good news and bad news are still news: Experimental evidence on belief updating," NOVAFRICA Working Paper Series wp1703, Universidade Nova de Lisboa, Nova School of Business and Economics, NOVAFRICA.
    • Handle: RePEc:unl:novafr:wp1703
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    More about this item

    Keywords

    Beliefs; Bayes' rule; asymmetric belief updating; conservatism; overconfidence;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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