Friday, April 21, 2006

Bayesian Beliefs

Next week, we will examine how beliefs are formed. Particularly, we will focus on building an economic model which will help us understand why certain beliefs become more common among certain people at certain points in time.

Before we get there, I thought I would spend some time outlining various findings on differences in beliefs across time and space.

Recall, at the start of the semester, I described the Bayesian view of belief formation which is the standard way economists assume that beliefs are formed. Bayesians argue that each individual starts with some sense of the probability that their beliefs are correct (their prior distribution). They go about their lives and receive new information that either confirms their existing beliefs or suggests that their beliefs are wrong. Based on how trustworthy the new information is thought to be, individuals update their prior belief distribution. Differences in initial beliefs, in access to new information, and in perceptions of the trustworthiness of the source of the new information generate differences in beliefs across time and space.

Bryan Caplan provides more discussion of the use of Bayes' Rule in economics in this post.

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