Two Forces Underlying Expectation Formation: Resistance and Readiness

This paper introduces a model to systematically understand expectation formation in environments in which individuals have to revise their beliefs, as new incoming information or newly learned theories about the environment are inconsistent with their prior beliefs. Our model rests on two simple assumptions: individuals have different entrenchments of ('resistance to give up') beliefs and they restore logical coherence of their beliefs. Our model predicts what the tipping points for agreement of an individual on a new expectation are. It predicts the missing links in arguments that can be provided to create agreement to a novel expectation. Moreover, it predicts which prior beliefs create resistance in an individual to accept a new expectation. We derive a taxonomy of structures of prior belief systems that explains different responses to strategic challenges among firm leaders.