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Trust in Signals and the Origins of Disagreement

Author

Listed:
  • Ing-Haw Cheng

    (Tuck School of Business, Dartmouth College)

  • Alice Hsiaw

    (Brandeis University International Business School)

Abstract

Why do individuals interpret the same information differently? We propose that individuals follow Bayes’ Rule when forming posteriors with one exception: when assessing the credibility of signal sources, they “double-dip” the data and use alreadyupdated beliefs instead of their priors. Individuals who make this mistake either overor underreact to new information depending on the order in which they received previous signals. Traders engage in excessive speculation associated with price bubbles and crashes. Our model provides a theory of the origins of disagreement: individuals disagree about both unknown states and credibility despite sharing common priors and information.

Suggested Citation

  • Ing-Haw Cheng & Alice Hsiaw, 2016. "Trust in Signals and the Origins of Disagreement," Working Papers 110R4, Brandeis University, Department of Economics and International Business School, revised Dec 2018.
    • Handle: RePEc:brd:wpaper:110r4
    as

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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP110R4.pdf
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    References listed on IDEAS

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