NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Using Models to Persuade

Joshua Schwartzstein, Adi Sunderam

NBER Working Paper No. 26109
Issued in July 2019, Revised in May 2020
NBER Program(s):Asset Pricing, Corporate Finance, Industrial Organization

We present a framework for analyzing “model persuasion.” Persuaders influence receivers’ beliefs by proposing models (likelihood functions) that specify how to organize past data (e.g., on investment performance) to make predictions (e.g., about future returns). Receivers are assumed to find models more compelling when they better explain the data, fixing receivers’ prior beliefs over states of the world. Model persuaders face a key tradeoff: models that better fit the data given receivers’ prior beliefs induce less movement in receivers’ beliefs. This tradeoff means that a receiver exposed to the true model can be most misled by persuasion when that model fits poorly—for instance when there is a lot of data that exhibits randomness. In such cases, a wrong model often wins because it provides a better fit. Similarly, competition between persuaders tends to neutralize the data because it pushes towards models that provide overly good fits and therefore do not move receivers’ beliefs much. The fit-movement tradeoff depends on receiver characteristics, so with multiple receivers a persuader is more effective when he can send tailored, private messages. We illustrate with examples from finance, business, politics, and law.

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Document Object Identifier (DOI): 10.3386/w26109

 
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