How Do Expectations Affect Learning About Fundamentals? Some Experimental Evidence

Individuals' output often depends not just on their ability and actions, but also on external factors or fundamentals, whose effect they cannot separately identify. At the same time, many individuals have incorrect beliefs about their own ability. Heidhues et al. (2018) characterise overconfident and underconfident individuals' equilibrium beliefs and learning process in these situations. They argue overconfident individuals will act sub-optimally because of how they learn. We carry out the first experimental test of their theory. Subjects take incorrectly-marked tests, and we measure how they learn about the marker's accuracy (the fundamental) over time. We use machine learning to identify heterogeneous effects. Overconfident subjects have lower beliefs about the fundamental, as Heidhues et al. (2018) predict, and thus would make sub-optimal decisions. But we find no evidence it is because of how they learn