Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence

32 Pages Posted: 19 Apr 2017

See all articles by Timo Henckel

Timo Henckel

Australian National University (Centre for Applied Macroeconomic Analysis)

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics

Peter G. Moffatt

University of East Anglia (UEA) - School of Economic and Social Studies

Daniel John Zizzo

University of Queensland - School of Economics

Date Written: April 3, 2017

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.

Keywords: belief revision, double hurdle model, expectations, overreaction, underreaction

JEL Classification: C34, C91, D03, D84, E03

Suggested Citation

Henckel, Timo and Menzies, Gordon Douglas and Moffatt, Peter G. and Zizzo, Daniel John, Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence (April 3, 2017). Available at SSRN: https://ssrn.com/abstract=2954472 or http://dx.doi.org/10.2139/ssrn.2954472

Timo Henckel

Australian National University (Centre for Applied Macroeconomic Analysis) ( email )

Canberra ACT 0200
Australia
+61-2-61255540 (Phone)
+61-2-61255570 (Fax)

HOME PAGE: http://apseg.anu.edu.au/staff/thenckel.php

Gordon Douglas Menzies

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

Peter G. Moffatt

University of East Anglia (UEA) - School of Economic and Social Studies ( email )

Norwich, Norfolk NR4 7TJ
United Kingdom

Daniel John Zizzo (Contact Author)

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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