The Economics of Beliefs under Fundamental Uncertainty
Journal
Working Paper
Type
journal article
Date Issued
2020-12
Author(s)
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.
Language
English
Keywords
Uncertainty
belief entrepreneurs
endogenous beliefs
heuristics
narratives
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
No
Subject(s)
Eprints ID
261672
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EndogBeliefs9.pdf
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Format
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