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Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence

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Abstract

Given a lack of perfect knowledge about the future, agents need to form expectations about variables a?ecting their decisions. We present an experiment where subjects sequentially receive signals about the true state of the world and need to form beliefs about which one is true, with payo?s related to reported beliefs. We control for risk aversion using the O?erman et al. (2009) technique. Against the baseline of Bayesian updating, we test for belief adjustment under-reaction and over-reaction and model the decision making process of the agent as a double hurdle model where agents ?rst decide whether to adjust their beliefs and, if so, then decide by how much. We ?nd evidence for sticky belief adjustment. This is due to a combination of: random belief adjustment; state-dependent belief adjustment, with many subjects requiring considerable evidence to change their beliefs; and Quasi-Bayesian belief adjustment, with insu?cient belief adjustment when a belief change does occur.

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  • Timo Henckel & Gordon Menzies & Peter Moffat & Daniel J. Zizzo, 2017. "Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence," Working Paper Series 40, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ecowps:40
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    More about this item

    Keywords

    belief revision; double hurdle model; expectations; overreaction; underreaction;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics

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