Why Do We Discriminate? Directional Beliefs and Biased Information Processing

Identifying the cause of discrimination is crucial to designing effective policies and to understanding discrimination dynamics. This paper provides a potential link between existing models of taste-based and statistical discrimination by studying directional belief formation through biased information search and processing. By selectively acquiring and processing information, individuals form directional beliefs and consequently discriminate based on these beliefs. Through a series of experiments in which individuals endogenously acquire and process various signals, I document discrimination stemming from directional beliefs and demonstrate important differences in how it manifests compared with taste-based and statistical discrimination. Finally, I show that limiting individuals’ scope to interpret information reduces such discrimination. This paper was accepted by Marie Claire Villeval, behavioral economics and decision analysis. Funding: Financial support from the Sustainable Architecture for Finance in Europe Experiment Center Frankfurt [Grant 232406], the Interdisciplinary Public Policy Mainz [Grant A2021011], and the Mainzer Wissenschaftsstiftung is gratefully acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.01818 .