Bayesian Reasoning: Evidence from the Field

To apply Bayes Rule when forming expectations agents must correctly assess the inherent “process variance” of each relevant cue, and place a larger weight on those cues with a smaller process variance. We test this notion by analysing subjective probabilities inferred from odds on the outcomes of tennis matches, exploiting natural variation in process variance related to the format with which tennis matches are played. Our results are consistent with “process variance neglect”, i.e., agents are not adjusting their ex-ante probabilities sufficiently according to process variance, and thus violate Bayes Rule. The resulting biases in expectations are costly.