Author(s)
Gordon D. Menzies, Economics Discipline Group, UTS Business School, University of Technology, Sydney, Timo Henckel, Australian National University, Peter Moffatt, University of East Anglia, Daniel J. Zizzo, Newcastle University
Date of publication: April 2017
Working paper number: 40
Abstract: Given a lack of perfect knowledge about the future, agents need to form expectations
about variables affecting 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 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, if so, then decide by how much. We find 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 insufficient belief
adjustment when a belief change does occur.