Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259545 
Year of Publication: 
2022
Series/Report no.: 
LEM Working Paper Series No. 2022/02
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
We consider a market economy where two rational agents are able to learn the distribution of future events. In this context, we study whether moving away from the standard Bayesian belief updating, in the sense of under-reaction to some degree to new information, may be strategically convenient for traders. We show that, in equilibrium, strong under-reaction occurs, thus rational agents may strategically want to bias their learning process. Our analysis points out that the underlying mechanism driving ex-ante strategical decisions is diversity seeking. Finally, we show that, even if robust with respect to strategy selection, strong under-reaction can generate low realized welfare levels because of a long transient phase in which the agent makes poor predictions.
Subjects: 
Learning
Strategic interaction
Behavioral Bias
Financial Markets
JEL: 
C60
D53
D81
D83
G11
G12
Document Type: 
Working Paper

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