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How Do Expectations Affect Learning About Fundamentals? Some Experimental Evidence

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Document pages: 35 pages

Abstract: Individuals output often depends not just on their ability and actions, butalso on external factors or fundamentals, whose effect they cannot separatelyidentify. At the same time, many individuals have incorrect beliefs about theirown ability. Heidhues et al. (2018) characterise overconfident andunderconfident individuals equilibrium beliefs and learning process in thesesituations. They argue overconfident individuals will act sub-optimally becauseof how they learn. We carry out the first experimental test of their theory.Subjects take incorrectly marked tests, and we measure how they learn about themarker s accuracy over time. We use machine learning to identify heterogeneouseffects. Overconfident subjects have lower beliefs about the fundamental, asHeidhues et al. predict, and thus would make sub-optimal decisions. But we findno evidence it is because of how they learn.

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