CFDP 1352

I'll See It When I Believe It — A Simple Model of Cognitive Consistency

Author(s): 

Publication Date: February 2002

Pages: 45

Abstract: 

Psychological experiments demonstrate that people exhibit a taste for consistency. Individuals are inclined to interpret new evidence in ways that confirm their pre-existing beliefs. They also tend to change their beliefs to enhance the desirability of their past actions. I present a model that incorporates these effects into an agent’s utility function and allows me to characterize when: (i) agents become under- and over-confident, (ii) agents exhibit excess stickiness in action choices, (iii) agents prefer less accurate signals, and (iv) agents are willing to pay in order to forgo signals altogether. Applications to political campaigns and investment decisions are explored.

Keywords: 

Belief utility, cognitive dissonance, confirmatory bias, overconfidence, selective exposure

JEL Classification Codes:  C90, D72, D83, D91, M30