Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence
32 Pages Posted: 19 Apr 2017
Date Written: April 3, 2017
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: Suggested Citation