Thoughts and Players: An Introduction to Old and New Economic Perspectives on Beliefs

Full text

An edited version of this article will appear in the book titled The Science of Beliefs:
A multidisciplinary Approach (provisional title), edited by Julien Musolino, Joseph
Sommer, and Pernille Hemmer, and published by Cambridge University Press.
Thoughts and Players:
An Introduction to Old and New
Economic Perspectives on Beliefs
Andras Molnar
Booth School of Business
University of Chicago
George Loewenstein
Social and Decision Sciences
Carnegie Mellon University
This version: March 16, 2021

ABSTRACT
In this chapter we summarize how economists conceptualize beliefs.
Moving both backward and forward in time, we review the way that
mainstream economics currently deals with beliefs, as well as, briefly, the
history of economists’ thinking about beliefs. Most importantly, we
introduce the reader to a recent, transformational movement in
economics that focuses on belief-based utility. This approach challenges the
standard economic assumption that beliefs are only an input to decision
making and examines implications of the intuitive idea that people derive
pleasure and pain directly from their beliefs. We also address the question
of when and why people care about what other people believe. We close
with a discussion of the implications of these insights for contemporary
social issues such as political polarization and fake news.
KEYWORDS
Anticipatory Emotions
Belief-based Utility
Cognitive Dissonance
False Beliefs
Homophily
Motivated Reasoning
Polarization
Self-esteem
Theory of Mind
CONTENTS
I. INTRODUCTION ................................................................................................................................... 1
II. THE ECONOMIC ACCOUNT OF BELIEFS ............................................................................. 1
III. BELIEF-BASED UTILITY................................................................................................................ 4
IV. SOURCES OF BELIEF-BASED UTILLITY ................................................................................. 6
V. UTILITY FROM OTHER PEOPLE’S BELIEFS ............................................................................. 8
VI. CONSEQUENCES OF BELIEF-BASED UTILLITY .............................................................. 11
VII. APPLICATIONS ................................................................................................................................ 14
VIII. CONCLUDING REMARKS ....................................................................................................... 16
IX. References ............................................................................................................................................ 17

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I. INTRODUCTION
In this chapter we provide an introduction into how economists conceptualize beliefs. We begin by
describing how mainstream economists currently view beliefs: merely as an input to decision making,
and not a direct source of utility—i.e., pleasure and pain. Reviewing the history of the utility concept,
we then show that the current perspective constitutes a century-long diversion from an earlier
perspective that acknowledged that beliefs—e.g., about one’s own self-worth or about one’s prospects
for the future—are direct sources of utility. Finally, we summarize a new line of work in economics—
belief-based utility—that integrates the original, historic perspective with the theoretical and empirical
methods of modern economics and offers a more realistic account of choice and behavior. We also
address the question of when and why people care about other people’s beliefs, and close with a
discussion of implications of these insights for contemporary social issues such as political polarization
and fake news.
II. THE ECONOMIC ACCOUNT OF BELIEFS
At the bedrock of modern, sometimes referred to as
‘neoclassical’ economics, is the concept of utility
maximization—the idea that people make decisions, and
take actions, to maximize their own well-being. When people
make decisions—e.g., to invest in education, purchase a
house, decide whether and who to marry and whether to
have children, of course, they do not always know what the
consequences of those decisions will be.
In such situations, economics assumes that they make
educated guesses—e.g., about what job prospects education
will yield, how much available jobs will pay, and how much
they will enjoy working in different occupations.
Economists conventionally assume that people make
decisions to maximize their expected utility—i.e., the sum of
probabilities of the outcomes of their decisions multiplied
by the anticipated utility of those outcomes.
1
1
As evidenced by Prospect Theory (Kahneman & Tversky, 1979) and its empirical demonstrations, people display
systematic biases in how they react to probabilities: people typically overweight small probabilities (e.g., the likelihood of
winning the lottery) and underweight high probabilities. However, Prospect Theory is still built around the principle that
people aim to maximize their expected utility, albeit with additional assumptions about how people weight probabilities
and how they determine the subjective value of outcomes.
The definition of beliefs in economics
Economics relies on a narrower and more
parsimonious definition of what beliefs are—and
what beliefs are not—than other disciplines, in
which the delineation between beliefs and non-
beliefs is less clear. In this chapter we focus on
beliefs as defined in economics:
Beliefs are subjective probability assessments or
expectations over outcomes or states of the world.
This definition has a property that makes it
particularly appealing to empiricists: beliefs have a
normative benchmark, that is, an objective
probability of outcomes or states, which the
subjective belief can be compared to, and
evaluated against. This implies that beliefs are—in
principle—always verifiable (or falsifiable), unlike,
for instance, taste or preferences, which are
idiosyncratic and do not have a benchmark.

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How do beliefs play into this perspective? Beliefs correspond to the probability assessments that enter
these expected utility calculations. For example, an individual might hold a belief that if they enrolled
in a master’s program in computer science, they would have a specific probability of passing, a
probability distribution of getting different types of paid positions with that degree, and a probability
distribution of fulfillments (utilities) from working at those jobs. All these probabilities, according to
conventional economics, correspond to the individual’s beliefs.
Most economists would acknowledge that individuals rarely have access to objective probabilities
(except for, perhaps, in the domain of gambling). As a result, people must often rely on imperfect,
subjective assessments of probabilities. Savage (1954) was the first who incorporated this insight into
expected utility theory. His Subjective Expected Utility (SEU) model relaxes the assumption of expected
utility theory (EUT) that decision makers know, and rely on, the objective probabilities of outcomes,
and allows them to make subjective probability judgments instead. Such subjective probabilities can
deviate markedly from the true probabilities prevailing in a particular situation; that is, SEU does not
assume that beliefs are necessarily accurate. Importantly, however, subjective probabilities in SEU are
still nothing more than decision weights, just like the objective probabilities in EUT.
The advent and wide adoption of EUT/SEU largely coincided with another line of research and
theorizing in economics, on the economics of information. This line of research, pioneered by Stigler’s
(1961) recognized that information is a commodity that, like other commodities, can be bought and
sold and even ‘mined’ or ‘manufactured’, in the sense that resources can be invested into procuring
and processing it (see, also, Arrow, 1973). The central problem that Stigler wanted to solve was how
to derive the value of information in a particular situation, and to make this problem tractable, he
made a highly simplifying assumption: that the economic value of information is its capacity to
enhance the quality of decisions, thereby increasing expected utility. That is, Stigler assumed that
information is valued to the extent, and only to the extent, that it aids in decision making.
A decade after Stigler’s pioneering contribution, a second wave of work on the economics of
information, most closely associated with George Akerlof, Michael Spence and Joseph Stiglitz (who
shared a Nobel prize for their work), examined different consequences of information asymmetries—
of the observation that people involved in economic interactions (e.g., the seller and potential buyer
of a car) often have access to different information sets. Although ground-breaking in its insights, all
of this work adhered to Stigler’s stylized assumption that information is valued solely as an input to
decision making.
In combination, SEU and the economic perspective on information, have far-reaching implications.
An SEU decision maker will want her beliefs to be as accurate as possible—since holding more
accurate probability judgments (i.e., ones that resemble objective probabilities more) allows her to
make better decisions and increase her expected utility. An SEU decision maker never misses an
opportunity to obtain free information and updates her beliefs rationally—according to the Bayes rule.
Furthermore, there is no reason to expect systematic biases in prior, and especially in posterior, beliefs:
if beliefs are based on sparse, noisy, and incomplete information, it is just as likely that someone will
underestimate the probability of some outcome as overestimating it.

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A Historical Diversion
As we noted, the view of beliefs as solely an input to decision making was a relatively late
development—around the middle of the 20th century. For more than a century and a half before that,
economists—at least in their writings—had a richer perspective on information. When Jeremy
Bentham first proposed the foundational utility concept in his 1789 classic An Introduction to the
Principles of Morals and Legislation (Bentham, 1789), he provided a list of the sources of positive utility
(pleasure) and negative utility (pain). This list included only a small number of material determinants:
specifically, pleasures and pains of “the senses” and pains of “privation.” Most of the other ingredients
of utility that he enumerated, however, clearly corresponded to purely mental outcomes: pleasures of
a good reputation, of memory, imagination, expectation and relief, and pains of awkwardness, enmity,
a bad reputation, memory, imagination and expectation.”
2
Adam Smith, sometimes viewed as the
founder of the field of economics, likewise, and especially in his book A Theory of Moral Sentiments
(Smith, 1759), gave prominence to the importance of beliefs as drivers of human behavior. “To what
purpose is all the toil and bustle of this world?” He asked, and answered: “To be observed, to be
attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages
we can propose to derive from it” (Smith, 1759, pp. 108–110). Economists continued to discuss, and
acknowledge the importance of, beliefs as direct source of utility up until the mid-20th century (see
Loewenstein, 1992). With the advent of the neoclassical revolution, however, they increasingly
struggled to incorporate beliefs into the new framework they were developing.
Neoclassical economics is sometimes described as the science of “constrained optimization” (Lazear,
2000); people are viewed as maximizing their utility from consumption and leisure, subject to
constraints on time and wealth. An important, albeit generally implicit, assumption of standard
economics is that the main ingredients of utility are material outcomes—e.g., consumption of food,
housing conditions, health status.
3
Material outcomes are easily incorporated into a constrained
optimization framework because they can be relatively easily measured and carry prices. By contrast,
it is far less obvious what the ‘price’ of beliefs are, and what constraints people are subject to when
forming their beliefs. Thus, in what could be viewed as a classic example of the ‘streetlight effect,’
neoclassical economics ignored the rather undeniable truth of the fact that people care directly about
what they believe, and focused solely on measurable, priced, material outcomes as the carriers of utility.
The ‘streetlight’ in economics has, however, become brighter, enabling a broader domain of discovery.
New tools of mathematical modeling, and a loosening of the positivist stricture that the only things
worthy of study are those that can be directly observed, have created an opening for new perspectives.
Belief-based utility, which we introduce in the next section, thus reflects a rediscovery of this rather
undeniable insight and represents a return to an earlier perspective.
2
All the other ingredients, such as pleasures of wealth, do not fall under one or the other category—e.g., wealth can
purchase consumption, but knowledge of one’s wealth (or lack thereof), can also confer purely cognitive utility.
3
“The ultimate goal of economic science is to improve the living conditions of people in their everyday lives. […] Higher
incomes mean good food, warm houses, and hot water. They mean safe drinking water and inoculations against the
perennial plagues of humanity.” (Samuelson & Nordhaus, 2010, p. 7)

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III. BELIEF-BASED UTILITY
The rather reductionist approach of mainstream economics—that beliefs do not have any other
purpose than to help individuals to select the best course of action—has never been universally
accepted among economists, and an alternative paradigm—that it is essential to understand how
people form beliefs and what preferences they have over beliefs—started gaining a foothold in the
late ‘70s and early 80’s. This alternative perspective, now
commonly referred to as ‘belief-based utility,’ recognizes the basic
insight that can be traced back to Bentham: that people derive
utility—pleasure and pain—directly from their beliefs. We care
especially about what other people think of us—whether people
think we are kind, smart, attractive. But we also care about our
beliefs about the world—e.g., whether the outcomes that people
experience are fair (Benabou & Tirole, 2006; Lerner, 1980)—and
about the future—e.g., whether we will be successful in career.
The evolutionary origins of caring about beliefs and a fundamental problem
Before we delve into how economics has modeled belief-based utility, it is worth addressing a broader
question: What is the origin of preferences over beliefs; that is, why do people cherish holding specific
beliefs but abhor others? While a definite answer is elusive and beyond the scope of this chapter,
evolutionary psychology offers some useful insights. There are several factors that are important for
survival and reproduction (i.e., evolutionary fitness) that are not incorporated into traditional drives
such as hunger and sex. For example, people are more likely to reproduce if they are physically
attractive, and more likely to survive and reproduce if they are held in high esteem by those around
them. According to this evolutionary account of belief-based preferences, then, evolution has imbued
humans with the propensity to care about these things. If it gives us utility to believe that we are
attractive and held in high esteem by others, then we will naturally take actions to make these beliefs
into a reality.
However, this mechanism is far from perfect because we have the ability to change our beliefs without
changing reality—e.g., to convince ourselves that we are gorgeous, or at least not that hard on the eye,
even if we are, in fact, hideous. This introduces a fundamental problem: While changing reality often
is effortful and sometimes requires cooperation between individuals, changing beliefs is, at least in
principle, trivially easy. At both an individual and societal level, the ability to easily manipulate one’s
beliefs can have negative consequences. For this evolutionary mechanism to work, therefore, there
must be constraints on our beliefs—constraints that prevent beliefs from straying too far from reality.
Such constraints do exist (see, e.g., Loewenstein & Molnar, 2018), though in the current era of fake
news and widespread conspiracy theories such as QAnon, we might wish that they were more
extensive and binding.
Belief-based utility
By belief-based utility, we refer to
the utility derived directly from
holding beliefs, whether or not
they are accurate. For example,
ego-utility—one’s beliefs about
one’s self-worth—are important
sources of utility or disutility.

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A brief history of belief-based utility
In a pioneering theoretical model, Kreps and Porteus (1978) introduced the idea that agents can have
intrinsic preference for information, or more precisely, how uncertainly is resolved over time, and this
motive is unrelated to the instrumental value of information. In another seminal paper, Akerlof and
Dickens (1982) modeled governmental intervention in workplace safety, and demonstrated that even
fully rational and perfectly informed workers might choose to hold overly optimistic beliefs about the
probability of accidents in a hazardous industry—and as a result, forgo safety measures. Since taking
precautionary measures would imply that people frequently think about the possibility of future
accidents (which would elicit substantial discomfort and anxiety), people choose to hold overly
optimistic beliefs, thus, reduce the psychic cost of fear of future accidents, at the expense of increasing
the objective risks of accidents by being less careful.
Another influential essay, The Mind as a Consuming Organ, that paved the way for research on belief-
based utility, was written by Thomas Schelling (1984), who was one of the pioneers of game theory
and its applications to foreign policy and military conflict. In his elegant paper, Schelling highlighted
that the traditional economic concept of ‘consumption’ describes only a fraction of what brings
pleasure and pain. Instead, much, and very likely most, of the things that affect human welfare happen
‘in the mind’. Echoing Bentham’s original conceptualization of utility, Schelling noted:
“We also consume by thinking. We consume past events that we can bring up from memory;
future events that we can believe will happen; contemporary circumstances not physically
present, like the respect of our colleagues and the affection of our neighbors and the health
of our children; and we can even tease ourselves into believing and consuming thoughts that
are intended only to please. We consume good news and bad news. We even—and this
makes it a little like traditional economics—spend resources to discover the truth about
things that happened in the past” (Schelling, 1984, p. 344).
Economic thinking about beliefs has been also greatly influenced by researchers outside of economics.
The psychologist Robert Abelson (1986), for example, in a paper titled Beliefs are Like Possessions,
advanced a very economic argument that the psychological value of beliefs might arise from many of
the same factors that confer value on possessions. These include their functionality (as in standard
economic theory), the degree to which they are shared with other members of one’s social group, their
uniqueness and rarity, their defensibility (how justified the belief is), their extremity (how intense they
are), and finally, the centrality of the belief (how well it fits with other beliefs). Abelson’s key insight
was that people are motivated to take actions to increase the values of their beliefs, from whatever
sources these arise, and this generic motive can explain a multitude of seemingly irrational patterns of
thought and behavior.
In a similar vein, research on motivated information processing in psychology (e.g., Kunda, 1990)
documented numerous situations in which people’s beliefs are influenced by their desires and

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preexisting beliefs, and identified the psychological strategies that people employ to arrive at beliefs
that make them feel good. In some extreme situations—when powerfully motivated, e.g., when it
comes to severe health issues—people seem to be capable of simply believing what they want to
believe, ignoring virtually all evidence to the contrary. Several recent reviews highlight that people are
motivated to maintain inaccurate beliefs and avoid information in a wide range of situations, often at
great cost to themselves (Bénabou & Tirole, 2016; Epley & Gilovich, 2016; Golman et al., 2017;
Loewenstein & Molnar, 2018).
IV. SOURCES OF BELIEF-BASED UTILLITY
Beliefs about future outcomes and anticipatory emotions
For any decision that has consequences for the future, there is some inherent uncertainty, which
requires people to form subjective probability assessments—beliefs—about the chance of each
possible outcome. Anticipatory emotions—hope, savoring, anxiety, and dread—capture feelings
associated with thinking about these potential future outcomes (Elster & Loewenstein, 1992). One of
the earliest empirical demonstrations of the consequences of such emotions was borne out of research
on intertemporal choice. Loewenstein (1987) proposed a model in which, anticipatory emotions
motivate people to act inconsistently with the predictions of standard economic models, which posit
that people prefer to delay negative outcomes, since the future is discounted more, and, for the same
reason, to expedite positive ones. By contrast, Loewenstein reported a series of studies in which most
participants preferred delaying pleasant hypothetical outcomes (e.g., kissing a movie star, having a
fancy dinner), and getting unpleasant outcomes over with quickly. These behavioral patterns have
been replicated in numerous studies involving real consequences: For example, in a study in which
participants were waiting to receive electric shocks, some individuals dreaded the outcome so much
that they chose to receive more voltage immediately rather than wait (Berns et al., 2006). Other studies
also demonstrated that these anticipatory emotions are closely related to the valence of outcomes, but
largely insensitive to the probability of them (Hsee & Rottenstreich, 2004; Loewenstein et al., 2001),
with consequences for decision making under conditions of risk.
Further theoretical work has highlighted the practical importance of these findings. Caplin and Leahy
(2001) showed that incorporating anticipatory emotions into the utility function might help to explain
long-standing economic anomalies, such intertemporal inconsistency (systematic changes in decision
with the passage of time), the equity premium puzzle, and people’s tendency to overreact to small
probabilities. Brunnermeier and Parker (2005) proposed a model in which beliefs have an impact on
well-being directly through anticipation of future utility, and show that this can lead to overly
optimistic beliefs, which can explain suboptimal behaviors in a wide range of areas (e.g., investment
decisions, consumption planning, managerial decisions).

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Beliefs about the self and ego-utility
The fact that people are pervasively concerned with protecting and enhancing their beliefs about
themselves—self-esteem—has been extensively discussed in the psychological literature (S. C. Jones,
1973; Markus, 1977). People strive to maintain a self-conception and image that is adaptive and
morally adequate, believing that they are competent, good, coherent, unitary, stable, and capable of
free choice (Steele, 1988). It has been hypothesized that self-esteem is a prevailing concern because it
reflects one’s eligibility for social inclusion, that is, it serves as a proxy signaling whether others think
the person is respected, beloved, and revered (Baumeister & Leary, 1995). Leary and Baumeister’s
“sociometer theory” proposes that self-esteem is mainly derived from what others believe about us,
and its function is to constantly monitor and assess one’s value as a relational partner (Leary &
Baumeister, 2000).
Considerable work in economics has focused on the pursuit of self-esteem: self-enhancement and
self-verification (for a book-length treatment, see Brennan & Pettit, 2004). Bénabou and Tirole (2002)
propose a general economic model in which people value their self-image, and seek to maintain or
improve it by engaging in behaviors that, in the absence of such motives, would be difficult to explain:
for example, self-handicapping, self-deception, selective attention, or selective forgetting. In their
subsequent work, the authors focus on the signaling function of actions. When people engage in
behaviors, they send signals to themselves and others about their underlying quality or ‘type’. Bénabou
and Tirole extend their model to show how concerns for self-image might interact with extrinsic
rewards (Bénabou & Tirole, 2003), prosocial behavior (Bénabou & Tirole, 2006), and identity and
morality in general (Bénabou & Tirole, 2011).
Taking a similar approach, Bodner and Prelec (2003) also assume that actions include a signal about
an individual’s identity and values, that is, actions are ‘self-signaling’. Therefore, in addition to the
utility associated with the outcomes of actions, such diagnostic utility always provides a separate
motive for thought and action. Kőszegi (2006) investigates motives for self-enhancement and self-
improvement. In his model people derive ‘ego utility’ from positive beliefs about their competence,
ability, and skills, and they engage in ambitious activities, because this signals that they are competent.
However, as Kőszegi shows, this can lead to overconfidence and to choosing overly ambitious tasks.
For example, if a mediocre manager derives ego utility from believing that he is more competent than
other managers, he might choose to proceed with an overly ambitious and risky project, well beyond
what he would be able to handle, thus making an ultimately costly error.
4
4
An interesting complication is that beliefs involving the self can be solid or fragile, which can make a big difference, as
revealed by substantial research in psychology on fragile self-esteem. The main thrust of the literature on this topic in
psychology has been on the role of fragile self-esteem in aggression (Baumeister, 1996; Berkowitz, 1978; Kernis et al.,
1989) and self-handicapping (e.g., E. E. Jones & Berglas, 1978). In a recent paper in economics, Loewenstein and coauthors
(Kőszegi et al., 2020) propose a theoretical account of fragile self-esteem as a multiple-equilibrium phenomenon, and draw
out its implications for a wide range of behaviors beyond aggression and self-handicapping, such as dropout from
education and job search, and workaholism.

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The value of intra-personal consistency of beliefs
Cognitive dissonance is posited to arise when people hold beliefs that conflict with one-another, or
with behaviors they engage in (Festinger, 1962). One specific type of conflict can arise if a person
reflects upon and compares her current beliefs to different previously held beliefs. Sudden changes in
beliefs can question the integrity or the rationality of the person, and individuals who change their
beliefs attitudes are typically evaluated more negatively than people who hold stable views (Allgeier et
al., 1979). This internally- or externally-motivated desire to hold consistent beliefs can lead to inertia
and a preference for status quo in beliefs—what decision scientists would call ‘conservative belief-
updating’ (Edwards, 1982). This idea is also echoed by Abelson’s characterization of “beliefs as
possessions” (1986). The ‘endowment effect’ captures the insight, demonstrated in countless studies,
that people become attached to, and reluctant to part with, objects they own (Kahneman et al., 1991).
By the same token, people value their current beliefs, and prefer to hold onto them, even if abandoning
or updating beliefs would allow them to make better-informed decisions.
There are various economic models that capture individuals’ intrinsic desire for temporally consistent
beliefs. In these models, people derive utility from maintaining consistent beliefs, even if this entails
making suboptimal choices (Akerlof & Dickens, 1982; Eyster, 2002; Falk & Zimmermann, 2011;
Yariv, 2005). In Eyster’s (2002) model people rationalize past mistakes by taking sub-optimal actions
in the present that can justify past mistakes. For example, a consumer who bought an expensive bottle
of wine—believing that it would be high quality—which turned out to be disappointingly low quality,
would more likely finish it (and thus, maintain her belief that the wine was good but suffer disutility
from the consumption) than someone else who obtained the same wine at a cheaper price—believing
that it would be low quality. Thus, a desire for intertemporal consistency—or ‘integrity’—of beliefs
offers an alternative explanation for the well-known sunk-cost effect. Yariv (2005) offers a similar
framework in which people can boost the desirability of their past actions by changing their current
beliefs, thus, reducing cognitive dissonance. Finally, in Falk and Zimmerman (2011) people signal intellectual
strength (both to themselves and others) by maintaining consistent beliefs and actions based on those;
that is, people are motivated to act in a consistent way to preserve positive esteem, even if this means
sticking to inferior choices.
V. UTILITY FROM OTHER PEOPLE’S BELIEFS
Nature has equipped humankind with an astonishingly advanced cognitive toolbox, that allows us to
represent what is happening in others’ minds. This remarkable ability goes by many names, most
prominently: theory of mind (Dennett, 1978; Leslie, 1987; Premack & Woodruff, 1978), mind reading
(Sperber & Wilson, 2002), and mentalizing (Frith & Frith, 2003). Most adults, and even most children
between the ages of 6–7, understand that others can have beliefs different from their own (Perner &
Wimmer, 1985). Moreover, people can distinguish between levels of mental representations (e.g.,
between “A believes X” and “B believes that A believes X”), and by adulthood, they can represent
even fourth-order levels of shared knowledge (Kinderman et al., 1998).

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Consider, for example, a scenario in which you have sprained your ankle and would love for a
colleague to pick you up and bring you to work (see Jaroszewicz, 2020, for a discussion of higher-
order beliefs in the context of help-seeking and help-giving). Your colleague would be willing to do it,
but only reluctantly. Suppose your colleague knows about your sprain (a first-order belief), but you do
not know if she knows (a second-order belief), and she does not know if you know that she knows (a
third-order belief). In that situation, she might not offer help, hiding her indifference to your plight
behind your presumed lack of knowledge. And you might be concerned that this is exactly what she
is doing—a fourth-order belief! Finally, people seem to be able to track others’ beliefs relatively
effortlessly and automatically (van der Wel et al., 2014), and engage in implicit mentalizing even
without being consciously aware of doing so (Schneider et al., 2015).
The role of others’ beliefs in economic models
While it is a stylized fact that most people constantly monitor what others believe, and are surprisingly
efficient and accurate in most cases, economics has largely neglected the idea that people care directly
about other people’s beliefs, beyond the value of such beliefs-about-beliefs for purely strategic purposes.
There is a long history of incorporating others’ beliefs and intentions into game theory (Battigalli et
al., 2019; Carpenter & Matthews, 2003; Charness & Rabin, 2002; Geanakoplos et al., 1989), and
research also shows that people are well-adapted to inferring others’ intentions in economic
interactions (Cushman, 2015; Heintz et al., 2016). However, this work has exclusively focused on
‘strategic’ interactions, in which knowing about someone else’s mental state can actually help one to
make better decisions. In such strategic contexts—which can be as innocuous as playing rock-paper-
scissors with friends, or as consequential as launching a military strike—outcomes depend on how
accurately one can infer others’ mental states and intentions. Therefore, an economic agent, as
conceived by conventional economics, would not care directly about what others believe—whether
others have the same or different beliefs, or whether others are acting upon false beliefs—and would
be motivated to know only those beliefs that could allow him or her to optimize his or her own
choices, in a rather self-centered and almost Machiavellian manner.
‘Direct’ concerns about others’ beliefs
People care about others’ beliefs not only for strategic reasons. In addition to the aversion to holding
beliefs that are internally inconsistent, people also find it aversive to hold beliefs that conflict with
those around them. In a paper on The Preference for Belief Consonance, Golman and coauthors (2016)
review literature showing that people find it uncomfortable to hold beliefs different from those around
them, and discuss some of the consequences of this (e.g., geographic sorting by political beliefs).
Golman et al. (2016) also propose an explanation for why the preference for belief-consonance exists.
According to their perspective, people make decisions and investments based on their beliefs. For
example, a devout Catholic attends church, donates money to it, and makes important life decisions
based on the church’s dictates. Confronting someone who has different religious beliefs forces the
Catholic to recognize the possibility that their own beliefs might be wrong, in which case all of the
decisions and investments may have been a mistake.

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In our own recent research, however (Molnar & Loewenstein, 2020), we have been advancing a subtly,
but we believe crucially, different perspective. Our own view is that it is not awareness that other
people have different beliefs than our own which causes discomfort. Rather, it is the belief that others
hold, and act on, beliefs that we perceive to be wrong. This idea is also captured by “Cunningham’s
Law”—named after Ward Cunningham, the developer of the first wiki—which states that “the best
way to get the right answer on the internet is not to ask a question; it’s to post the wrong answer.”
5
At
the heart of this rather witty “law” lies the intuition that people have a strong desire to correct others’
beliefs when they deem those beliefs to be false. Aligned with the above anecdotal evidence, our own
research demonstrates that participants express stronger negative feelings (i.e., are more disturbed,
upset, and frustrated) when they encounter others who—from the participant’s point of view—hold
false beliefs, compared to when participants think that others’ beliefs are merely different from their
own (Molnar & Loewenstein, 2020). These strong negative emotions can then, based on the situation
and the type of relationship, either trigger approach (e.g., confronting the other person, attempting to
persuade them) or avoidance behaviors (e.g., blocking the other person online).
The subject of these false beliefs can be anything: beliefs about the individual (e.g., misunderstanding
one’s intentions), about relationships (incorrectly believing that someone’s partner had been cheating
on them), economic outcomes (tax cuts on the rich ultimately “trickle down” to help the poor), or
even global phenomena (climate change is unrelated to human activity). What matters more is not the
domain of belief, rather, the conviction that someone else holds an incorrect view of the individual,
relationships, outcomes, or the world. The more convinced people are that others hold false beliefs,
the more upset they will be (Molnar & Loewenstein, 2020), and the more likely they will take some
action (either confront these others, or making extra effort to avoid them).
The evolutionary origins of caring about others’ beliefs
Why would—why do—people have an intrinsic preference for what others believe, let alone, trying to
change—or avoid—those beliefs? Why are we not only disturbed by other’s beliefs when those beliefs
have clear consequences for us—e.g., when someone mistakenly believes that we have committed a
crime and seek to punish us for our perceived infraction? Constantly gauging whether someone else’s
beliefs will affect us would require a lot of cognitive capacity. We speculate that it might be a more
efficient approach for evolution to have equipped us with an almost automatic, intrinsic aversion to
the perception that others hold false beliefs. Such a mechanism would save us from making an
effortful judgment, each time we encounter someone with different beliefs, about whether those
different beliefs are likely to impact us negatively. Instead, we very likely evolved to rely on heuristics that
inform us about whether, how much, to care about what others believe. Heuristic processing (as
opposed to complex expected utility maximization) has been hypothesized to result in behavior that
is both adaptive and ecologically rational (Gigerenzer & Gaissmaier, 2011; Hertwig & Engel, 2016).
In this context, such heuristics might include: the social closeness of the other person (i.e., how inter-
5
https://nancyfriedman.typepad.com/away_with_words/2010/05/word-of-the-week-cunninghams-law.html, retrieved
on 3/6/2021

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11
dependent is the individual and the other person); network centrality of the other person (i.e., how
many others could the other person influence, thus, have their beliefs spread); or the perceived
conviction of the other person (if someone is more confident in their false beliefs, they are more likely
to act upon them). Such an evolutionary process might incorporate a bias in favor of caring about
others’ beliefs when they do not impact us, relative to not caring when they do, so as to minimize the
occurrence of the more costly error of not caring when those beliefs do affect us. According to error
management theory (Haselton & Buss, 2000), the types of errors people make when choosing their
actions may incur drastically asymmetric costs and benefits, in terms of evolutionary fitness, leading
to exactly this kind of evolved bias.
VI. CONSEQUENCES OF BELIEF-BASED UTILLITY
Information avoidance
Perhaps the most common and oft-discussed consequence of belief-based utility is information
avoidance: People avoid information that would otherwise force them to embrace a reality that they
would prefer to remain oblivious to (Golman et al., 2017; Hertwig & Engel, 2016; Sweeny et al., 2010).
This behavior violates traditional economic principles (‘never avoid instrumental information’), but,
is fully consistent with the more nuanced economic models that incorporate belief-based utility. As
highlighted in an extensive review by Golman et al. (2017), information avoidance may be motivated
by all types of belief-based concerns that we covered in Sections IV-V: the desire to maintain
optimistic beliefs and to reduce negative feelings; the preference for having a positive and integral self-
concept; the motive to hold consistent beliefs and to reduce cognitive dissonance; and finally, to
strengthen one’s social identity and social ties. Moreover, just as diverse motives may drive
information avoidance, avoidance itself may take many forms, such as physical avoidance (e.g.,
refusing to get a medical test), inattention (turning a blind eye to amassing empirical evidence on
climate change), forgetting (selectively remembering only positive feedback), or self-handicapping
(only engaging in easy tasks, to minimize the chance of poor performance).
Biased information processing
Even if people cannot avoid information, they have substantial leeway in how to interpret it, and
whether to incorporate newly acquired information into their beliefs. Abelson proposed the idea that
people treat and value their beliefs like possessions, and, just like possessions, people are often
reluctant to give up beliefs, and hence ready to defend them. Abandoning or drastically updating
beliefs is costly, and people prefer to maintain an overall coherence of their beliefs: they will reject
new information if that creates an imbalance in their belief system, or they distort it so as to maintain
balance (Abelson, 1986). This desire for consistency and aversion to negative updates results in various
information-processing biases. Confirmation bias refers to the tendency of people to seek and interpret

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information in a way that supports their existing beliefs (Klayman & Ha, 1987; Nickerson, 1998).
6
Rabin and Schrag’s (1999) model posits that such non-Bayesian information updating can produce
confirmation bias even in the face of an infinite amount of information. This motive for interpreting
information in a self-serving way is particularly strong when information affects self-esteem, in which
cases it often manifests in self-deception or asymmetric belief-updating. Eil and Rao (2011) found that people
update their beliefs about attributes they care about (physical attractiveness and intelligence) in a highly
biased fashion: discounting negative, but not positive, signals. As a recent review by Sharot and Garrett
highlighted, this pattern of behavior—fully incorporating desirable information while discounting or
neglecting negative information—is prevalent in the majority of the population, about 80% of people,
regardless of country or gender (Sharot & Garrett, 2016).
Intertemporal choice: Choosing between the present and the future
Belief-based utility also has far-reaching implications for intertemporal choice. Standard theories of
intertemporal choice assume that there is a positive time discounting factor, so that future outcomes and
utilities are given less weight in decision making than present ones. Although these models enable a
straightforward treatment of preferences for intertemporal sequences of consumption, they fail to
explain some simple and common patterns of intertemporal preferences—specifically why people
prefer to get unpleasant outcomes over with quickly (e.g., finishing work before going on holiday),
and in some cases people opt for delaying pleasant outcomes (e.g., savoring a nice dinner, an expensive
bottle of wine, or a movie). These ‘anomalies’ would imply a negative discount factor: present experiences
and consumption should weigh less than future ones. However, these patterns are easily reconciled
with standard models of time discounting if we allow for the possibility that people also derive
anticipatory utility from the expectation itself (Elster & Loewenstein, 1992; Loewenstein, 1987).
Decision making under risk and uncertainty
Standard theories of decision making under risk and uncertainty, which assume that people have well-
defined and consistent preferences towards risk-taking, struggle to explain why the same person would
buy both lottery and insurance: voluntarily taking risk in one case, while minimizing it in another.
However, this behavior is perfectly reasonable if we realize that these transactions do not only involve
a choice between risky and riskless outcomes but also entail purchasing a belief—the dream to win the
jackpot, or the peace of mind that comes with being insured against losses—and that this belief is, in
and of itself, pleasurable to its holder. Therefore, in many cases, when people are apparently making
a choice between risky and safe option, they actually are making a tradeoff between different beliefs:
hope or hopelessness, anxiety or peace of mind.
6
In a seminal study Lord, Ross, and Lepper (1979) exposed people who either opposed or supported death penalty to the
same empirical evidence, and found that participants’ beliefs became more polarized as their initial opinions shifted
towards more extreme views. Beyond demonstrating polarization in response to new information, the study also provided
evidence for the mechanism that produced it. People interpreted the evidence in a self-confirmatory way: they took into
account evidence that supported their view more strongly than evidence that opposed their view.

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Belief-based utility from self-image and the desire for intertemporal consistency over beliefs might
also interact with decisions involving risk and uncertainty. For example, hedging desired outcomes
(e.g., betting against one’s favorite team) is an expected utility maximizing strategy in standard utility
models, however, people often are reluctant to hedge such outcomes, because doing so would trigger
undesired thoughts (e.g., their favorite team losing), or send a negative self-signal (betraying their
team). Furthermore, the hedge would introduce a motivational conflict as well (rooting for and against
success at the same time), which people find aversive (Morewedge et al., 2016). On the other hand,
even people who otherwise dread uncertainty might find it pleasurable to bet on desirable outcomes
(e.g., which player from their favorite team will perform better, Golman et al., 2021).
Overconfidence and overoptimism
The subject of the previous section, risk preferences, are also closely associated with overconfidence and
overoptimism. If people are motivated to hold positive beliefs about their ability, skills, or the future in
general, they will be prone to form overly positive beliefs—e.g., to believe that they are more
competent or more experienced than they actually are, or, believe that their future prospects are more
rosy than what rational expectations would suggest. This can influence decisions with long-term—
often irreversible—consequences, such as educational or career choices, investment and managerial
decisions, preferences over medical treatments, or engagement is risky activities in everyday life.
Whether such overconfidence or overoptimism is self-fulfilling and actually leads to desirable
outcomes (in other words: “fake it till you make it”) or whether it is self-defeating and leads to failure
and disappointment, depends on various factors, for example, whether confidence and optimism can
boost motivation, effort, and persistence (for a discussion of how these factors interact see, Bénabou
& Tirole, 2002; Compte & Postlewaite, 2004; Kőszegi, 2006, 2010).
Social consequences: Ideological conformity and segregation by beliefs
One consequence of the preference for belief consonance—the desire to surround oneself with
likeminded others, see Section V—is that the dominant beliefs that are shared within a group the
individual belongs to—or aspires to belong to—severely constrain, or even determine, the beliefs that
she holds. Expressing dissent with the group’s dominant belief system could lead to detrimental
psychological and social consequences: weaken one’s identity and social ties within the group, or in
the worst case, culminate in ostracism. A Republican, for example, might lose friends by openly
expressing a belief that climate change is caused by human activity, and this social cost looms much
larger than the benefit of holding and articulating an opposing belief. Such motives at the individual
level can lead to enormous societal consequences, for example, to pluralistic ignorance—in which the
majority openly supports a norm or regulation that contradicts with the majority’s (private) preferences
(Prentice & Miller, 1993). Homophily and the desire for belief consonance can also result in belief-
based segregation, polarization, and escalate inter-group conflicts. Furthermore, when individuals have
social motives for holding inaccurate beliefs, in addition to the individual reasons outlined above
(anticipatory feelings, ego, consistency), such preferences can culminate in collective delusions or
‘groupthink,’ amplifying the potential consequences of holding inaccurate beliefs (Bénabou, 2013).

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VII. APPLICATIONS
Historical events often have an impact on the social and behavioral sciences. For example, in the
aftermath of World War II and the atrocities of the Nazis, topics such as authoritarianism and
obedience to authority captured the attention of researchers. The events of the last few decades have
likewise had a salutary effect on the prominence of belief-based utility. Two decades ago, most
economists would almost certain have agreed that the main goal of information processing is to arrive
at an accurate understanding of the world—to form accurate beliefs so as to make better decisions.
To the extent that economists knew about or believed in belief-based utility or motivated beliefs, it
was viewed as a minor phenomenon and a fringe topic of study. Confronted with the dramatic
developments of recent times, that is dramatically no longer the case. In the last few years, economists
have started applying the theoretical and empirical tools that they specialize in to study such topics as
politics, finance, or health economics.
Politics: news consumption, misinformation, and polarization
Perhaps the most obvious application of the concepts outlined in this chapter—belief-based utility
and caring about what others believe—is political preferences and ideological polarization. A plethora
of contemporary social and political issues seem to be intimately linked to the observation that what
we believe about ourselves, others, and the world, affect our well-being and actions: the emergence of
ideological bubbles and ‘echo chambers’ (Sunstein, 2001); the polarization of political beliefs and
belief-based geographic sorting (Bishop, 2009); and the advent of ‘alternative facts’ and post-truth
politics (Barrera et al., 2020).
Economists have only recently started to investigate the role of motivated beliefs in this undoubtedly
consequential context—in the aftermath of Donald Trump’s upset victory in the 2016 presidential
election. This line of research has focused on individuals’ news consumption habits and biased
preferences for information. Chopra et al. (2019), for example, found that people who read an openly
biased newspaper that aligned with their political views, had a lower demand for more objective and
balanced coverage from the same newspaper, demonstrating that people have a demand for biased
news. This motive is consistent with a desire to confirm pre-existing beliefs and seeking out sources
that present self-concordant perspectives, even when people are fully aware of the biased nature of
these source. In light of these findings, it is barely surprising that when Allcott et al. (2020) incentivized
people to deactivate their Facebook—which, along with other social media platforms, is considered
to be the primary channel that facilitates self-exposure to concordant views (Allcott & Gentzkow,
2017). A four-week long deactivation of Facebook accounts significantly reduced the extremity of
their views on issues of policy. However, it remains an open question how policymakers can combat
belief polarization, and by doing so, improve the quality of public discourse, without implementing
such drastic measures as banning or suspending the use of certain platforms.

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Finance: portfolio choice and investor behavior
The idea that people cherish positive beliefs, even if these are inaccurate or redundant, has profound
consequences to financial markets and investor behavior. Pagel (2018) proposed that if people derive
a separate ‘news utility,’ in addition to instrumental value of information, and if people are loss-averse
over news (i.e., dislike bad news more than how much they like good news), investors will prefer not
to pay attention to their portfolios, and delegate portfolio management to others. Karlsson et al. (2009)
investigated the behavior of Scandinavian and American investors and found that investors monitor
their portfolios more frequently—thus, keep themselves more informed—when asset prices are rising
than when markets are steady or plummeting, to avoid receiving potential bad news—a pattern of
behavior that the authors aptly labeled as “the ostrich effect.” Further research showed that investors
display motivated attention even when markets are closed, that is, are more likely to check their
accounts when they know that their portfolio has performed well—an adult version of “shaking the
piggy bank” (Sicherman et al., 2016). These studies corroborate the idea that investors do not only
care about the instrumental value of checking (and paying attention to) stock prices, but also glean
value from whether they receive good or bad news. The timing of when people look up the current
value of their portfolio has significant implications for trading behavior as well. It is well established
that people dislike selling stocks at a loss, relative to the price they purchased it at—the ‘disposition
effect’. Examining the login and trading behavior of a large sample of individual investors, Quispe-
Torreblanca and coauthors (2021) find that the investors are reluctant to sell their stocks at a loss, not
only relative to the stocks’ purchase prices, but also relative to when they last logged in to their account
(and presumably observed the values of their investments).
Healthcare: medical testing, health insurance, and vaccination
Motivated beliefs can lead to suboptimal decisions in a multitude of domains, but perhaps the most
consequential errors occur in decisions related to health. Many people skip important medical tests
and postpone recommended screenings which could prevent the development of more serious
conditions and diseases, just to avoid thinking about potential negative outcomes, and to reduce their
anxiety (for a detailed review, see Sweeny et al., 2010). For example, Oster, Shoulson, and Dorsey
(2013) found that presymptomatic genetic testing among individuals at risk for Huntington disease—
a hereditary disease with limited life expectancy—is surprisingly rare, and that untested individuals
express overoptimistic beliefs about their future health, even when they have a high chance of carrying
the gene responsible for the disease. As a result of their unrealistic beliefs, at-risk individuals end up
making decisions (e.g., family planning, retirement) as if they do not have the disease. Similarly,
Ganguly and Tasoff (2016) documented that many people are even willing to pay to avoid learning the
results of a medical test if it could reveal that they have been infected with an STD.
As noted, information avoidance does not only entail physically avoiding information but can also
involve neglecting to draw obvious conclusions from information one cannot avoid receiving.
Consistent with such an effect, Sicherman et al. (2021) find, in a survey of parents of children
ultimately diagnosed with autism as well as of their friends and family, that the family and friends often
recognize that their child has a problem well before the parents do. This could have a variety of causes,

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but the parents themselves endorse information-avoidance as an explanation. Asked to what extent
their agreed with the statement “Thinking back to before [name of child] was diagnosed: Do you think
that at some level you suspected that x had a serious condition, but you preferred not to know?” 20%
responded “Yes, definitely,” and 32% responded “Possibly.”
Anticipatory feelings can also affect how people choose their health insurance coverage: people might
purchase overpriced health insurance plans with low deductibles, which allows them to have their
‘peace of mind’: they do not have to be afraid of unexpected expenses (Hsee & Kunreuther, 2000).
Finally, motivated beliefs—or “magical beliefs” (Bryden et al., 2018)—and focusing on emotional
narratives (Kata, 2012) instead of objective data can indirectly lead to the spread of diseases and
malpractices. This is clearly evidenced by the rise of anti-vaccination and pseudo-scientific
movements, or in general, any kind of non-evidence based ‘medicine’ (homeopathy, cupping,
acupuncture). Despite abundant scientific support for vaccines, anti-vaccination movements pose
threat to public health again in many countries, rendering policymakers and health-care workers
helpless, since education and information provision do not seem to curb these movements.
Organizational behavior: Employee effort and managerial decisions
One central question in organizational science and labor economics is how to incentivize employees
to achieve optimal efficiency. Standard economic theory asserts that monetary incentives improve
performance, and there is a monotonic relation between incentives and effort (i.e., higher incentives
cannot lead to lower effort, and vice versa). However, voluntary engagement in different tasks conveys
signals about one’s competence (e.g., Kőszegi 2006), commitment and moral character, both to the
self, and to others, thus affecting self-esteem and self-image (Bénabou & Tirole, 2003). Because the
presence of extrinsic incentives can make these signals less reliable, employers must consider very
carefully how to incentivize their employees, as inappropriately chosen incentives can crowd out
intrinsic incentives for work and lead to reduced motivation and effort. The preference for positive
ego-relevant beliefs has implications for managers as well. Research has documented that managers
remain persistently overconfident and maintain unrealistic beliefs about their ability, even after
receiving repeated feedback (Huffman et al., 2019). Huffman et al. (2019) also demonstrate the
mechanism which allows overconfidence to persist: managers distort their memories in a self-serving
way by selectively forgetting negative feedback, while remembering positive feedback.
VIII. CONCLUDING REMARKS
In this chapter we have provided an overview of the economic perspective, and economic research,
on beliefs. We started off by describing how, for economists, beliefs correspond to probabilities that
different propositions are true, and that mainstream economics has traditionally treated beliefs as,
solely, an input to decision making. We have also explained that these assumptions, in combination,
lead naturally to the conclusion that people will want to form the most accurate beliefs that they can
(taking into account the costs of gathering and processing information), and that people will never

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17
deliberately avoid information. The concept of belief-based utility, as we have shown, violates all of
these assumptions and predictions. Recognizing that people derive pleasure and pain directly from
their beliefs, independently of the ‘usefulness’ of those beliefs, leads to a wide range of implications,
including that people may not want to have beliefs that are as accurate as possible, and that they may
avoid information that threatens their self-concept or their views about the world.
Inevitably, given the length constraints, there are several important topics and open questions we were
not able to deal with. One of these is the relationship between beliefs and attention. In many situations,
it is not clear whether the pleasure or pain associated with beliefs arises from the beliefs themselves,
or from thinking about—paying attention to—those beliefs. In the study of investors by Sicherman
et al. (2016), for example, investors whose portfolios had risen in the recent past were more likely to
log in to, and look at, their portfolio information multiple times on the weekend when the market is
closed. This form of information-seeking seems to be more driven by wanting to attend to positive
information than by wanting to develop positive beliefs—which investors already had.
A second, and related, issue has to do with what the constraints on beliefs are (for a brief discussion of
potential constraints, see, Loewenstein & Molnar, 2018). Economics is often seen as the discipline
that studies constrained optimization—e.g., how to derive maximum consumption utility from a fixed
amount of wealth. However, as we noted in Section III, beliefs are not constrained in the same way
that consumption is: People can, at least in principle, believe whatever they want to believe, and one
avenue to elevating utility is to form beliefs that are as positive as positive. A crucial next step for this
line of research will be to identify those factors and mechanisms that constrain beliefs.
Final comments
In this paper we introduce the reader to the burgeoning literature in economics dealing with belief-
based utility. Although the idea that beliefs confer pleasure and pain directly may seem so obvious to
not be worthy of note, in some cases stepping back from a phenomenon, and being introduced to
another person, or group’s perspective, can help to see it with new eyes. It would give us pleasure to
believe that this will be the case for this review.
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