Belief Adjustment: A Double Hurdle Model and Experimental Evidence

Icon of open book, ANU

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 payoffs related
to reported beliefs. We control for risk aversion using the Offerman 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 first decide whether to adjust their beliefs and then,
if so, decide by how much. We find evidence for periods of belief inertia interspersed
with belief adjustment. This is due to a combination of: random belief adjustment; statedependent
belief adjustment, with many subjects requiring considerable evidence to
change their beliefs; and Quasi-Bayesian belief adjustment, with insufficient belief
adjustment when a belief change does occur.

Attachments