Hostname: page-component-7b9c58cd5d-9klzr Total loading time: 0 Render date: 2025-03-17T06:23:53.562Z Has data issue: false hasContentIssue false

Good news and bad news are still news: experimental evidence on belief updating

Published online by Cambridge University Press:  14 March 2025

Alexander Coutts*
Affiliation:
Nova School of Business and Economics, Universidade NOVA de Lisboa, Campus de Campolide, 1099-032 Lisbon, Portugal

Abstract

Bayesian updating remains the benchmark for dynamic modeling under uncertainty within economics. Recent theory and evidence suggest individuals may process information asymmetrically when it relates to personal characteristics or future life outcomes, with good news receiving more weight than bad news. I examine information processing across a broad set of contexts: (1) ego relevant, (2) financially relevant, and (3) non value relevant. In the first two cases, information about outcomes is valenced, containing either good or bad news. In the third case, information is value neutral. In contrast to a number of previous studies I do not find differences in belief updating across valenced and value neutral settings. Updating across all contexts is asymmetric and conservative: the former is influenced by sequences of signals received, a new variation of confirmation bias, while the latter is driven by non-updates. Despite this, posteriors are well approximated by those calculated using Bayes’ rule. Most importantly these patterns are present across all contexts, cautioning against the interpretation of asymmetric updating or other deviations from Bayes’ rule as being motivated by psychological biases.

Type
Original Paper
Copyright
Copyright © 2018 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-018-9572-5) contains supplementary material, which is available to authorized users.

References

Ambuehl, S, & Li, S (2018). Belief updating and the demand for information. Games and Economic Behavior, 109, 2139. 10.1016/j.geb.2017.11.009CrossRefGoogle Scholar
Antoniou, C, Harrison, GW, Lau, MI, & Read, D (2015). Subjective Bayesian beliefs. Journal of Risk and Uncertainty, 50(1), 3554. 10.1007/s11166-015-9208-5CrossRefGoogle Scholar
Azrieli, Y, Chambers, CP, & Healy, PJ (2018). Incentives in experiments: A theoretical analysis. Journal of Political Economy, 10.1086/698136CrossRefGoogle Scholar
Barber, BM, & Odean, T (2001). Boys will be boys: Gender, overconfidence, and common stock investment. Quarterly Journal of Economics, 116(1), 261292. 10.1162/003355301556400CrossRefGoogle Scholar
Barron, K. (2016). Belief updating: Does the ’good-news, bad-news’ asymmetry extend to purely financial domains? WZB Discussion Paper (October).Google Scholar
Benabou, R, & Tirole, J (2002). Self-confidence and personal motivation. The Quarterly Journal of Economics, 117(3), 871915. 10.1162/003355302760193913CrossRefGoogle Scholar
Blanco, M, Engelmann, D, Koch, AK, & Normann, HT (2010). Belief elicitation in experiments: Is there a hedging problem?. Experimental Economics, 13(4), 412438. 10.1007/s10683-010-9249-1CrossRefGoogle Scholar
Buser, T., Gerhards, L., & Weele, J. V. D. (2018). Responsiveness to feedback as a personal trait. Journal of Risk and Uncertainty.CrossRefGoogle Scholar
Camerer, CF (1987). Do biases in probability judgment matter in markets?. Experimental Evidence. The American Economic Review, 77(5), 981997.Google Scholar
Camerer, CF Kagel, JH, & Roth, AE (1995). Individual decision making. The handbook of experimental economics, Princeton, NJ: Princeton University Press 587703.CrossRefGoogle Scholar
Clark, J, & Friesen, L (2009). Overconfidence in forecasts of own performance: An experimental study. Economic Journal, 119(534), 229251. 10.1111/j.1468-0297.2008.02211.xCrossRefGoogle Scholar
Coutts, A. (2015). Testing models of belief bias: An experiment. Mimeo , RePEc:pra:mprapa:67507.Google Scholar
Edwards, W, & Kleinmuntz, B (1968). Conservatism in human information processing. Formal Representation of Human Judgment,, Hoboken: John Wiley & Sons Inc 51.Google Scholar
Eil, D, & Rao, JM (2011). The good news-bad news effect: Asymmetric processing of objective information about yourself. American Economic Journal: Microeconomics, 3(2), 114138.Google Scholar
Ertac, S (2011). Does self-relevance affect information processing? Experimental evidence on the response to performance and non-performance feedback. Journal of Economic Behavior & Organization, 80(3), 532545. 10.1016/j.jebo.2011.05.012CrossRefGoogle Scholar
Gilboa, I, & Schmeidler, D (2001). A theory of case-based decisions, Cambridge: Cambridge University Press 10.1017/CBO9780511493539CrossRefGoogle Scholar
Grether, DM (1980). Bayes rule as a descriptive model: The representativeness heuristic. The Quarterly Journal of Economics, 95(3), 537 10.2307/1885092CrossRefGoogle Scholar
Grether, DM (1992). Testing bayes rule and the representativeness heuristic: Some experimental evidence. Journal of Economic Behavior & Organization, 17(1), 3157. 10.1016/0167-2681(92)90078-PCrossRefGoogle Scholar
Grossman, Z, & Owens, D (2012). An unlucky feeling: Overconfidence and noisy feedback. Journal of Economic Behavior Organization, 84(2), 510524. 10.1016/j.jebo.2012.08.006CrossRefGoogle Scholar
Healy, P. J. (2016). Explaining the BDM—Or any random binary choice elicitation mechanism—To Subjects. Mimeo.Google Scholar
Holt, C, & Smith, AM (2009). An update on Bayesian updating. Journal of Economic Behavior & Organization, 69(2), 125134. 10.1016/j.jebo.2007.08.013CrossRefGoogle Scholar
Kahneman, D, & Tversky, A (1972). Subjective probability: A judgment of representativeness. Cognitive Psychology, 3(3), 430454. 10.1016/0010-0285(72)90016-3CrossRefGoogle Scholar
Kahneman, D, & Tversky, A (1973). On the psychology of prediction. Psychological Review, 80(4), 237251. 10.1037/h0034747CrossRefGoogle Scholar
Karni, E (2009). A mechanism for eliciting probabilities. Econometrica, 77(2), 603606. 10.3982/ECTA7833Google Scholar
Karni, E, Safra, Z, & Society, TE (1987). Preference reversal” and the observability of preferences by experimental methods. Econometrica, 55(3), 675685. 10.2307/1913606CrossRefGoogle Scholar
Kuhnen, CM (2014). Asymmetric learning from financial information. The Journal of Finance, LXX(5), 20292062. 10.1111/jofi.12223Google Scholar
Landier, A. (2000). Wishful thinking a model of optimal reality denial. Mimeo pp. 125.Google Scholar
Machina, MJ, & Schmeidler, D (1992). A more robust definition of subjective probability. Econometrica, 60(4), 745 10.2307/2951565CrossRefGoogle Scholar
Mayraz, G. (2014). Priors and desires—A model of optimism, pessimism, and cognitive dissonance. Mimeo pp. 147.Google Scholar
Mobius, M., Niederle, M., Rosenblat, T., & Niehaus, P. (2014). Managing self-confidence: Theory and experimental evidence. Mimeo.Google Scholar
Rabin, M, & Schrag, JL (1999). First impressions matter: A model of confirmatory bias. The Quarterly Journal of Economics, 114(1), 3782. 10.1162/003355399555945CrossRefGoogle Scholar
Scheier, ME, & Carver, CS (1987). Dispositional optimism and physical well-being: The influence of generalized outcome expectancies on health. Journal of Personality, 55(2), 169210. 10.1111/j.1467-6494.1987.tb00434.xCrossRefGoogle ScholarPubMed
Schlag, KH, Tremewan, J, & van der Weele, JJ (2015). A penny for your thoughts: A survey of methods for eliciting beliefs. Experimental Economics, 18(3), 457490. 10.1007/s10683-014-9416-xCrossRefGoogle Scholar
Schotter, A, & Trevino, I (2014). Belief elicitation in the lab. Annual Review of Economics, 6, 103128. 10.1146/annurev-economics-080213-040927CrossRefGoogle Scholar
Shah, P, Harris, AJL, Bird, G, Catmur, C, & Hahn, U (2016). A pessimistic view of optimistic belief updating. Cognitive Psychology, 90, 71127. 10.1016/j.cogpsych.2016.05.004CrossRefGoogle ScholarPubMed
Sharot, T, Korn, C, & Dolan, R (2011). How unrealistic optimism is maintained in the face of reality. Nature Neuroscience, 14(11), 14751479. 10.1038/nn.2949CrossRefGoogle ScholarPubMed
Sharot, T, Kanai, R, Marston, D, Korn, CW, Rees, G, & Dolan, RJ (2012). Selectively altering belief formation in the human brain. Proceedings of the National Academy of Sciences, 109(42), 17,05817,062. 10.1073/pnas.1205828109CrossRefGoogle ScholarPubMed
Wiswall, M, & Zafar, B (2015). How do college students respond to public information about earnings?. Journal of Human Capital, 9(2), 117169. 10.1086/681542CrossRefGoogle Scholar
Yariv, L. (2005). I’ll see it when i believe it—A simple model of cognitive consistency. Mimeo.Google Scholar
Supplementary material: File

Coutts supplementary material

Online Appendix for Good News and Bad News are Still News: Experimental Evidence on Belief Updating
Download Coutts supplementary material(File)
File 547.5 KB