How Do Expectations Affect Learning About Fundamentals? Some Experimental Evidence

TL;DR

This paper experimentally investigates how incorrect beliefs about ability influence learning about an external parameter, showing overconfident individuals become less accurate in their beliefs and exert less effort over time.

Contribution

It provides experimental evidence on how overconfidence impacts learning and effort in a setting where individuals cannot disentangle their ability from the external parameter.

Findings

Overconfident subjects reduce effort and beliefs worsen over time.

Beliefs about marker accuracy decline by 0.05 during the experiment.

No significant effects observed for underconfident subjects.

Abstract

We test how individuals with incorrect beliefs about their ability learn about an external parameter (`fundamental') when they cannot separately identify the effects of their ability, actions, and the parameter on their output. Heidhues et al. (2018) argue that learning makes overconfident individuals worse off as their beliefs about the fundamental get less accurate, causing them to take worse actions. In our experiment, subjects take incorrectly-marked tests, and we measure how they learn about the marker's accuracy over time. Overconfident subjects put in less effort, and their beliefs about the marker's accuracy got worse, as they learnt. Beliefs about the proportion of correct answers marked as correct fell by 0.05 over the experiment. We find no effect in underconfident subjects.