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Keynes Fund

Summary of Project Plan

Motivated beliefs theory proposes that individuals systematically distort beliefs because they affect utility. Biased recall has been proposed as a primary enabler of motivated beliefs, and several recent empirical studies have demonstrated that individuals have positively biased recollections of ego-relevant signals. One leading theoretical explanation for biased recall is that it helps individuals to overcome their own biases in choice behaviour, such as present bias. This is now known as the instrumental motive for biased recall.

We will run a large-scale experiment on a representative sample of US residents, designed to closely recreate the setting of a canonical model of motivated beliefs. Its aim is to test whether the so-called instrumental motive for belief distortion operates as predicted by theory, and in what circumstances. Importantly, we extend existing models to account for the possibility that ex ante (pre-choice) belief distortions serve a different motive than ex post distortions (at the time of choice), meaning belief distortion is time inconsistent. Our model can therefore reconcile seemingly contradictory findings in the existing empirical literature: belief distortions often seem to enable selfish choices, but in other cases constrain them. Our experiment can test whether this disparity is driven by the timing of belief distortion, as predicted by our extension of existing theories.

The proposed study aligns closely with the aims of the Keynes Fund. Motivated beliefs have been observed in a diverse set of contexts, ranging from financial markets to personal health. One interpretation of these belief distortions is that they create market failures: people could be excessively overconfident and make mistakes in important investment and lifestyle decisions. However, motivated beliefs theory suggests overconfidence is a tool to overcome behavioural biases in choices. Our experiment will clarify whether the distorted recall of information creates or mitigates market failures by examining whether it facilitates or constrains undesirable behaviours at the individual level.

Project Information

Project Code: JHWJ
Project Investigators
  • Rebecca Heath
  • Vivek Roy-Chowdhury
Research Round
Twenty-second Round (March 2023)

Project Investigators

Rebecca Heath is a PhD student, at the Faculty of Economics, University of Cambridge. Her research interests are in Image Concerns and Online Social Networks.

Vivek Roy-Chowdhury is a PhD student, at the Faculty of Economics, University of Cambridge. His research interests are in Applied Microeconomics and Behavioural Economics.