Biased beliefs and imperfect information

• Published in: Journal of economic behavior & organization Vol. 136; pp. 186 - 202
• Main Authors: Proto, Eugenio, Sgroi, Daniel
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.04.2017
• Subjects: Attitudes; Biased beliefs; Characteristics; Information; Self-centered bias; D84; Characteristics; Self-centered bias; D03; Attitudes; Biased beliefs; Information; C83
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2017.01.020

•We test the accuracy of beliefs about differently observable characteristics.•We find a powerful and ubiquitous bias in perceptions that is “self-centered”.•Extremes tend to perceive themselves as closer to the middle of the distribution.•We provide a way to disentangle the different explanations for this bias.•We discuss policy implication for informational herding, auction theory, etc. We perform an experiment designed to assess the accuracy of beliefs about characteristics and decisions. Subjects are asked to declare beliefs typically formed through real world experiences. They are then asked to report beliefs concerning other individuals from the same environment. We test two main hypotheses: (i) whether for items not perfectly observable, individuals suffer from some type of biased beliefs; (ii) whether this bias is reduced when information is more readily available. We find a powerful and ubiquitous bias in perceptions that is “self-centered” in the sense that those at extremes tend to perceive themselves as closer to the middle of the distribution than is the case. This bias does not completely disappear when the information is more readily available. We present evidence from our experiment that limited attention and self-serving deception can provide explanations for this bias and present important economic applications.