Publication Date: February 2002
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.
Belief utility, cognitive dissonance, conﬁrmatory bias, overconﬁdence, selective exposure
JEL Classification Codes: C90, D72, D83, D91, M30