Belief Distortions Research Articles

The Mortgage‐Cash Premium Puzzle

ABSTRACTAll‐cash homebuyers account for one‐third of U.S. home purchases between 1980 and 2017. We use multiple data sets and research designs to robustly estimate that mortgaged buyers pay an 11% premium over all‐cash buyers to compensate home sellers for mortgage transaction frictions. A dynamic, representative‐seller model implies only a 3% premium, which would suggest an 8% puzzle. Accounting for heterogeneity in selling conditions explains half of this difference, but a puzzle holds in conditions with high transaction risk. An experimental survey of U.S. homeowners replicates these patterns and suggests that belief distortions can explain the puzzle in these high‐risk states.

Survey Data and Subjective Beliefs in Business Cycle Models

Abstract This paper develops a theory of subjective beliefs that departs from rational expectations, and shows that biases in household beliefs have quantitatively large effects on macroeconomic aggregates. The departures are formalized using model-consistent notions of pessimism and optimism which are supported by extensive time-series and cross-sectional evidence from household surveys. The role subjective beliefs play in aggregate fluctuations is quantified in a business cycle model with goods and labour market frictions. Consistent with the survey evidence, an increase in pessimism generates upward biases in unemployment and inflation forecasts and lowers economic activity. The underlying belief distortions reduce aggregate demand and propagate through frictional goods and labour markets. As a by-product of the analysis, solution techniques that preserve the effects of time-varying belief distortions in the class of linear solutions are developed.

Motivated Optimism and Workplace Risk

Abstract We provide field evidence that individuals engage in motivated optimism in the face of impending risk. Congruent with a dynamic anticipatory utility model, we demonstrate that belief distortions are time and stake dependent. Our study leverages variation in the time span between the survey and the externally imposed date when workers are required to return to their workplaces during the COVID-19 pandemic. We show that, as the work return date approaches, individuals become relatively more optimistic about the increased infection risk associated with going back to the workplace, and about how severely their health may be impacted if they get infected. Belief distortions are larger among those facing potential health complications conditional on infection. Our results are informative about when and for whom interventions will be most effective.

What to Blame? Self-Serving Attribution Bias with Multi-Dimensional Uncertainty

Abstract People often receive feedback influenced by external factors, yet little is known about how this affects self-serving biases. Our theoretical model explores how multi-dimensional uncertainty allows additional degrees of freedom for self-serving bias. In our primary experiment, feedback combining an individual’s ability and a teammate’s ability leads to biased belief updating. However, in a follow-up experiment with a random fundamental replacing the teammate, unbiased updating occurs. A validation experiment shows that belief distortion is greater when outcomes originate from human actions. Overall, our experiments highlight how multi-dimensional environments can enable self-serving biases.

Robust adoption and valuation in tokenomics

This paper incorporates model uncertainty into the dynamic token-based platform adoption and valuation theory. We find that ambiguity slows down the tokenized platform adoption since users with the belief distortion tend to prevent the perturbation of the platform productivity, thus weakening the appreciation of the expected token price and the decline of the token carry cost due to the user-base growth. Moreover, as concerns regarding model uncertainty induce a trade-off between token price appreciation expectation and ambiguity hesitation, comparing the adoption speeds in the robust tokenized economy and the tokenless economy depends on the severity of the ambiguity aversion. Finally, ambiguity amplifies the user-base volatility of the tokenized economy, which, however, is still lower than that of the tokenless economy.

Belief distortion near 52W high and low: Evidence from Indian equity options market

AbstractWe examine investors' behavioral biases and preferences in the options market near 52‐week high and low (52W‐H/L) using Indian options market data. We document that as the stock price approaches 52W high (low), the skewness of risk‐neutral density (RND), and out‐of‐the‐money (OTM) call volume decreases (increases), while OTM put volume increases (decreases). After crossing the 52W high (low), the skewness of RND and OTM call volume increases (decreases), while OTM put volume decreases (increases). The effects are economically large and significant. Our findings provide evidence consistent with the anchoring theory of belief distortion near 52W‐H/L. There is no evidence of preference distortion, contrary to what prospect theory predicts.

Enabling or Limiting Cognitive Flexibility? Evidence of Demand for Moral Commitment

Moral behavior is more prevalent when individuals cannot easily distort their beliefs self-servingly. Do individuals seek to limit or enable their ability to distort beliefs? How do these choices affect behavior? Experiments with over 9,000 participants show preferences are heterogeneous—30 percent of participants prefer to limit belief distortion, while over 40 percent prefer to enable it, even if costly. A random assignment mechanism reveals that being assigned to the preferred environment is necessary for curbing or enabling self-serving behavior. Third parties can anticipate these effects, suggesting some sophistication about the cognitive constraints to belief distortion. (JEL C91, D82, D83, D91)

It's not a lie if you believe the norm does not apply: Conditional norm-following and belief distortion

We investigate self-serving belief distortion about dominant norms of honesty. Consider an environment where the subject can earn a monetary reward by lying. In contrast to the existing literature on motivated beliefs, we do not focus on distortion in one dimension alone, but instead consider beliefs in two dimensions: empirical (what other people do) and normative (what other people approve of). Our experimental findings are consistent with the predictions of a dual-self model in which conditional norm-followers strategically distort their beliefs to justify self-serving behavior. We argue that the asymmetry between what we infer from empirical as opposed to normative information is a key ingredient of belief distortion in our context: widespread honest behavior is a strong indicator of disapproval of lying (and thus that a norm of honesty is followed), but the opposite does not hold. Taken together, we show why, when, and which norm-relevant beliefs are strategically distorted.

Belief Distortions and Macroeconomic Fluctuations

This paper combines a data-rich environment with a machine learning algorithm to provide new estimates of time-varying systematic expectational errors (“belief distortions”) embedded in survey responses. We find sizable distortions even for professional forecasters, with all respondent-types overweighting the implicit judgmental component of their forecasts relative to what can be learned from publicly available information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by large margins, with belief distortions evolving dynamically in response to cyclical shocks. The results suggest that artificial intelligence algorithms can be productively deployed to correct errors in human judgment and improve predictive accuracy. (JEL C45, D83, E23, E27, E31, E32, E37)

Esteemed Colleagues: A Model of the Effect of Open Data on Selective Reporting of Scientific Results.

Open data, the practice of making available to the research community the underlying data and analysis codes used to generate scientific results, facilitates verification of published results, and should thereby reduce the expected benefit (and hence the incidence) of p-hacking and other forms of academic dishonesty. This paper presents a simple signaling model of how this might work in the presence of two kinds of cost. First, reducing the cost of “checking the math” increases verification and reduces falsification. Cases where the author can choose a high or low verification-cost regime (that is, open or closed data) result in unraveling; not all authors choose the low-cost route, but the best do. The second kind of cost is the cost to authors of preparing open data. Introducing these costs results in that high- and low-quality results being published in both open and closed data regimes, but even when the costs are independent of research quality open data is favored by high-quality results in equilibrium. A final contribution of the model is a measure of “science welfare” that calculates the ex-post distortion of equilibrium beliefs about the quality of published results, and shows that open data will always improve the aggregate state of knowledge.

Robust identification of investor beliefs

This paper develops a method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential belief distortions bounded by a statistical measure of discrepancy. Additionally, our method allows for the direct use of sparse survey evidence to make these bounds more informative. Within our framework, market-implied beliefs may differ from those implied by rational expectations due to behavioral/psychological biases of investors, ambiguity aversion, or omitted permanent components to valuation. Formally, we represent evidence about investor beliefs using a nonlinear expectation function deduced using model-implied moment conditions and bounds on statistical divergence. We illustrate our method with a prototypical example from macrofinance using asset market data to infer belief restrictions for macroeconomic growth rates.

Cognitive Flexibility or Moral Commitment? Evidence of Anticipated Belief Distortion

Do people anticipate the conditions that enable them to manipulate their beliefs when confronted with unpleasant information? We investigate whether individuals seek out the “cognitive flexibility” needed to distort beliefs in self-serving ways, or instead attempt to constrain it, committing to unbiased judgment. Experiments with 6500 participants, including financial and legal professionals, show that preferences are heterogeneous: over 40% of advisors prefer flexibility, even if costly. Actively seeking flexibility does not preclude belief distortion. Individuals anticipate the effects of cognitive flexibility and their choice to pursue it responds to incentives, suggesting some sophistication about the cognitive constraints to belief distortion.

Feedback spillovers across tasks, self-confidence and competitiveness

Does feedback on success in a task increase individuals' beliefs about their chance to succeed in a subsequent, unrelated, task? Does feedback on failure have a symmetric effect? Is the distortion of beliefs, possibly due to motivated beliefs, mistakes in updating or the feeling of having a lucky day, heterogeneous across individuals, in particular according to their status in the society? Conducting an artefactual field experiment in India with participants from different castes, we show that feedback on success in a forced competition in a first task increases winners' self-confidence and competitiveness in the subsequent task. Such feedback spillovers on self-confidence are asymmetric and heterogeneous according to status and more likely for already more confident individuals.

Stereotypes and Politics

We examine US voters’ beliefs about views held by Republicans and Democrats. While individuals exaggerate partisan differences on a range of socioeconomic and political issues, we document that belief distortions are larger on issues that individuals consider more important. We organize these facts using a model of stereotypes where distortions are stronger for issues that are more salient to voters. In line with the model, belief distortions are predictable from the differences across parties, in particular the relative prevalence of extreme attitudes. To assess the impact of issue salience, we show that the end of the Cold War in 1991, which shifted US voters’ attention away from external threats and towards domestic issues, led to an increase in perceived polarization in the latter, and more so for issues with more stereotypical partisan differences. The reverse pattern occurred after the terrorist attacks in 2001, when attention swung back towards external threats. The distortions we identify are quantitatively significant, and could have important consequences for political engagement as such distortions strongly predict voting turnout. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

“Koro and Migration”: Observational Study of an Outbreak of Koro in a Migrant Population Working in South India

Introduction: Koro is a culture-bound syndrome, common in India, characterized by the belief that one’s genitals are shrinking followed by the fear of impending death. Significant social stressors can precipitate this syndrome in vulnerable populations. One such factor is migration which is associated with increased vulnerability to neurosis and poor coping. It has been a less studied factor in the genesis of Koro and the same has been an interesting association in this study. Methods: There was an outbreak of Koro (13 cases: 8 males and 5 females) among a population (n = 52) from east and middle India who had migrated to the south for manual work. These cases presented in clusters to our psychiatry outpatient department within a span of 2 weeks. We did an observational study to explore the sociodemographic and clinical correlates of these patients. Their perceptions and attributions to the illness were also reported. Results: Most patients were married men with lower socioeconomic status and no formal education. More females were however affected than earlier reported data. Most patients knew about the illness and believed that it was contagious. Death anxiety, loss of libido, and insomnia were common associated complaints. Males feared impotence, whereas females feared of “loss of child-bearing” abilities. The major attributing factors to the illness were migration, the stigma of working near a “mental hospital,” and sharing shelter with the affected. Pharmacotherapy and single-session cognitive behavioral therapy were used for treatment. Conclusions: Our study revealed unique clinical correlates and belief-systems of patients affected with Koro. It is time we stop seeing it just as “culture-bound syndrome” and begin seeing it also as a social disorder caused by distortion of body-related beliefs. Migration being a significant environmental stressor can often precipitate such culture-bound syndromes. Further mixed-method studies are warranted.

Requiem for a Nudge: Framing effects in nudging honesty

We examine framing effects in nudging honesty, in the spirit of the growing norm-nudge literature, by utilizing a high-powered and pre-registered study. Across four treatments, participants received one random truthful norm-nudge that emphasized ‘moral suasion based on either what other participants previously did (empirical message) or approved of doing (normative message) and varied in the framing (positive or negative) in which it was presented. Subsequently, participants repeatedly played the ‘mind game’ in which they were first asked to think of a number, then rolled a digital die, and then reported whether the two numbers coincide, in which case a bonus was paid. Hence, whether or not the report was truthful remained unobservable to the experimenters. We find compelling null effects with tight confidence intervals showing that none of the norm-nudge interventions worked. A follow-up experiment reveals the reason for these convincing null-effects: the information norm-nudges did not actually change norms. Notably, our secondary results suggest that a substantial portion of individuals misremembered norm-nudges such that they conveniently supported deviant behavior. This subset of participants indeed displayed significantly higher deviance levels, a behavior pattern in line with literature on motivated misremembering and belief distortion. We discuss the importance of this high-powered null finding for the flourishing norm-nudge literature and derive policy implications.

Cognitive Flexibility or Moral Commitment? Evidence of Anticipated Belief Distortion

Do people anticipate the conditions that enable them to manipulate their beliefs when confronted with unpleasant information? We investigate whether individuals seek out the “cognitive flexibility” needed to distort beliefs in self-serving ways, or instead attempt to constrain it, committing to unbiased judgment. Experiments with 6500 participants, including financial and legal professionals, show that preferences are heterogeneous: over 40% of advisors prefer flexibility, even if costly. Actively seeking flexibility does not preclude belief distortion. Individuals anticipate the effects of cognitive flexibility and their choice to pursue it responds to incentives, suggesting some sophistication about the cognitive constraints to belief distortion.

Belief Distortions and Macroeconomic Fluctuations

Belief Distortions and Macroeconomic Fluctuations

It's Not a Lie If You Believe the Norm Does Not Apply: Conditional Norm-Following with Strategic Beliefs

We experimentally investigate whether individuals strategically distort their beliefs about dominant norms. Embedded in the context of lying, we systematically vary both the nature of elicited beliefs (descriptive about what others do, or normative about what others approve of) and whether subjects are aware of the forthcoming lying opportunity at the belief-formation stage. We build a dual-self model of belief distortion applied to the context of social norms and derive a number of precise predictions. Our findings provide a perspective on why, when and which norm-relevant beliefs are strategically distorted and show that not all belief distortions are created equal.

Robust Identification of Investor Beliefs

This paper develops a new method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential belief distortions bounded by a statistical measure of discrepancy. Additionally, our method allows for the direct use of sparse survey evidence to make these bounds more informative. Within our framework, market-implied beliefs may differ from those implied by rational expectations due to behavioral/psychological biases of investors, ambiguity aversion, or omitted permanent components to valuation. Formally, we represent evidence about investor beliefs using a novel nonlinear expectation function deduced using model-implied moment conditions and bounds on statistical divergence. We illustrate our method with a prototypical example from macro-finance using asset market data to infer belief restrictions for macroeconomic growth rates. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.