Confirming Signals Are Hard to Resist: Blessing and Curse of Information under Confirmation Bias

In a world of increasingly extensive information, rational investors can make better decisions. However, reinforcement-oriented investors are also more likely to observe preferred signals close to their prior estimate. A focus on these signals reduces belief adaptation. Thus, under the empirically well-documented reinforcement theory, additional information can decrease perception correctness. It explains why wider information accessibility has not increased price efficiency significantly. Managers have an incentive to provide more, diffuse (fewer, precise) signals in case of negative (positive) information. This provides predictions for the post-earnings-announcement drift and dispersion anomaly. An extension shows that the distribution shape matters for information processing. JEL Classification: G02, G12