Motivated Belief Updating and Rationalization of Information

Abstract

We study belief updating about relative performance in an ego-relevant task. Manipulating the perceived ego relevance of the task, we show that subjects substantially overweight positive information relative to negative information because they derive direct utility from holding positive beliefs. This finding provides a behavioral explanation why and how overconfidence can evolve in the presence of objective information. Moreover, we document that subjects who receive more negative information downplay the ego relevance of the task. These findings suggest that subjects use two alternative strategies to protect their ego when presented with objective information. This paper was accepted by Marie Claire Villeval, behavioral economics and decision analysis. Funding: The authors gratefully acknowledge financial support from the ExperimenTUM. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.02537 .