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Learning About Unstable, Publicly Unobservable Payoffs

Elise Payzan-LeNestour¹; Peter Bossaerts²

¹ UNSW Australia Business School, University of New South Wales, Sydney · ² David Eccles School of Business, University of Utah, Salt Lake City and Faculty of Business and Economics, University of Melbourne, Melbourne

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?

DOI

10.1093/rfs/hhu069

Volume

28 (7)

Pages

1874-1913

Language

en

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