When Beliefs Influence the Perceived Signal Precision: The Impact of News on Reinforcement-Oriented Agents
Abstract
In a world of increasingly extensive information, rational investors can make better decisions. However, reinforcement-oriented investors are also more likely to observe preferred signals close to their own perception. A focus on these signals distorts the perceived aggregate signal in the direction of the prior estimate. This reduces belief adaptation. Hence, the empirically well-documented selective exposure/reinforcement theory reduces the positive impact of greater information availability on price efficiency. Additional information can sometimes even decrease perception correctness. In a market with biased investors, managers have an incentive to announce more diffuse (fewer precise) signals in case of negative (positive) information. This results in postearnings-announcement drift and dispersion anomaly. Also, the distribution shape matters for information processing. For unimodal, symmetric distributions, agents’ perceptions converge to the fundamental—even though at a reduced speed. For multimodal signal distributions, the estimate can diverge from the fundamental.
This paper was accepted by Yan Chen, behavioral economics and decision analysis.
Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4941.
