Learning About Unstable, Publicly Unobservable Payoffs
E Payzan-LeNestour, P Bossaerts
The Review of Financial Studies | OXFORD UNIV PRESS INC | Published : 2015
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 gratefully acknowledge financial support from the Swiss Finance Institute, NCCR FINRISK of the Swiss National Science Foundation, and The University of New South Wales.