Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/149243
Authors: 
Maier, Johannes
König, Clemens
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper 6156
Abstract: 
We propose a model of instrumental belief choice under loss aversion. When new information arrives, an agent is prompted to abandon her prior. However, potential posteriors may induce her to take actions that generate a lower utility in some states than actions induced by her prior. These losses loom larger than gains in other states in which potential posteriors lead to larger utility than the prior. In choosing her belief, the agent optimally trades off these psychological gains and losses against the belief's objective performance. Consistent with empirical evidence, belief updating in this model is conservative and can be asymmetric, so that bad news is updated more conservatively than good news. These updating biases generate prior-dependent information preferences, such that agents may avoid information when being unconfident but are information seeking otherwise. Because belief updating depends on the decision problem in which new information is going to be used, the model allows us to explore how these predictions change with either individual preferences or the choice context.
Subjects: 
belief choice
non-Bayesian updating
reference dependence
loss aversion
regret
conservatism
signal valence
information preferences
overconfidence
JEL: 
D03
D81
D83
D84
G02
Document Type: 
Working Paper

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