Date: October 19th, 2023 (12:30 pm – 1:30 pm)

Speaker: WonSeok Yoo

Paper Title: “Belief Updating Under Cognitive Dissonance: An Experimental Study”

Abstract: Cognitive dissonance is the psychological tension that arises from holding two conflicting beliefs, views, or actions simultaneously. We investigate the dynamics of belief updating in the face of such cognitive dissonance, particularly within financial decision making contexts. By introducing transaction costs in a controlled laboratory setting, we are able to simulate conditions that naturally induce cognitive dissonance among participants. Within our experimental design, subjects are initially endowed with one of two potential assets at random. They are then asked to report their beliefs regarding their assigned asset after a series of signals. For particular cases, they subsequently face a decision: to either switch or keep their initial asset. Our findings present evidence that the imposition of transaction costs deters individuals from “switching” compared to Bayesian benchmark. Moreover, individuals distort their beliefs to better justify their sub-optimal decision to retain their original asset in an effort to align their beliefs with their actions and alleviate cognitive dissonance.e a causal relationship between judicial institutions and economic development.