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Hierarchical Bayesian Analysis of Biased Beliefs and Distributional Other-Regarding Preferences

This study investigates the relationship between an actor's beliefs about others' other-regarding (social) preferences and her own other-regarding preferences, using an "avant-garde" hierarchical Bayesian method. We estimate two distributional other-regarding preference parameters, and , of actors using incentivized choice data in binary Dictator Games. Simultaneously, we estimate the distribution of actors' beliefs about others' and , conditional on actors' own and , with incentivized belief elicitation. We demonstrate the benefits of the Bayesian method compared to it's hierarchical frequentist counterparts. Results show a positive association between an actor's own (; ) and her beliefs about average (; ) in the population. The association between own preferences and the variance in beliefs about others' preferences in the population, however, is curvilinear for and insignificant for . These results are partially consistent with the cone effect (1,2) which is described in detail below. Because in the Bayesian-Nash equilibrium concept, beliefs and own preferences are assumed to be independent, these results cast doubt on the application of the Bayesian-Nash equilibrium concept to experimental data.