Neoclassical finance assumes that investors are Bayesian. In many realistic situations, Bayesian learning is challenging. Here, we consider investment opportunities that change randomly, while payoffs are observable only when invested. In a stylized version of the task, we wondered whether performance would be affected if one were to follow reinforcement learning principles instead. The answer is a definite yes. When asked to perform our task, participants overwhelmingly learned in a Bayesian way. They stopped being Bayesians, though, when not nudged into paying attention to contingency shifts. This raises an issue for financial markets: who has the incentive to nudge investors?

Neoclassical finance assumes that investors are Bayesian. In many realistic situations, Bayesian learning is challenging. Here, we consider investment opportunities that change randomly, while payoffs are observable only when invested. In a stylized version of the task, we wondered whether performance would be affected if one were to follow reinforcement learning principles instead. The answer is a definite yes. When asked to perform our task, participants overwhelmingly learned in a Bayesian way. They stopped being Bayesians, though, when not nudged into paying attention to contingency shifts. This raises an issue for financial markets: who has the incentive to nudge investors?

We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If they are ambiguity-averse, these agents become price-insensitive. Results from an experiment show that, consistent with the theory, (i) without aggregate risk, mispricing decreases as the fraction of price-sensitive agents increases; and (ii) with aggregate risk, price-insensitive agents trade to more balanced portfolios.