The Economics of Beliefs under Fundamental Uncertainty

Item Type Journal paper
Abstract

Introducing the concept of “belief entrepreneur”, this paper offers a novel theory on endogenous belief formation under fundamental uncertainty in the sense of \textcite{Knight1921}. We consider a generic setup in which individuals must choose between a tested approach (supplied by a “defender”) and a competing innovative approach (supplied by an “innovator”). While the innovation is promising, its true merits are uncertain (e.g., financial engineering in the 1990s). Facing an ambiguous choice, individuals are susceptible to narratives. The innovator and defender thus act as competing belief entrepreneurs who engage in a narrative contest whose outcome shapes individual prior beliefs. We clarify the conditions under which the contest outcome predominantly reflects information on the merits of the innovation---and when other factors, such as the entrepreneurs’ payoffs, dominate. Our analysis may be helpful to regulators that have to grapple with innovations whose fundamentals they do not know any better than the public.

Authors Binswanger, Johannes & Oechslin, Manuel
Journal or Publication Title Working Paper
Language English
Keywords Uncertainty, belief entrepreneurs, endogenous beliefs, heuristics, narratives
Subjects economics
social sciences
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Economic Policy
Refereed No
Date December 2020
Depositing User Prof. Dr. Johannes Binswanger
Date Deposited 11 Dec 2020 20:50
Last Modified 11 Dec 2020 20:52
URI: https://www.alexandria.unisg.ch/publications/261672

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Binswanger, Johannes & Oechslin, Manuel (2020) The Economics of Beliefs under Fundamental Uncertainty. Working Paper,

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https://www.alexandria.unisg.ch/id/eprint/261672
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