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Updating beliefs with imperfect signals: Experimental evidence

We conduct an experiment on individual choice under risk in which we study belief updating when an agent receives a signal that restricts the number of possible states of the world. Subjects observe a sample drawn from an urn and form initial beliefs about the urn’s composition. We then elicit how beliefs are modified after subjects receive a signal that restricts the set of the possible urns from which the observed sample could have been drawn. We find that this type of signal increases the frequency of correct assessments and that prediction accuracy is higher for lower levels of risk. We also show that prediction accuracy is higher after invalidating signals (i.e. signals that contradict the initial belief). This pattern is explained by the lower level of risk associated with invalidating signals. Finally, we find evidence for a lack of persistence of choices under high risk.