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 Ø, of actors using incentivized choice data in binary Dictator Games. Simultaneously, we estimate the distribution of actors' beliefs about others » and Ø, conditional on actors' own » and Ø, 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 (»; Ø ) and her beliefs about average(»; Ø) 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 Ø. 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.