Information Characteristics and Errors in Expectations: Experimental Evidence

Constantinos Antoniou, Glenn W. Harrison, Morten Igel Lau, Daniel Read

Publikation: Working paperForskningpeer review

Resumé

Behavioural finance theories draw on evidence from psychology that suggest that some people respond to information in a biased manner, and construct theories of inefficient markets. However, these biases are not always robust when tested in economic conditions, which casts doubt on their relevance to market efficiency. We design an economic experiment to test a psychological hypothesis of errors in expectations widely cited in finance, which states that, in violations of Bayes Rule, some people respond more forcefully to the strength of an information signal. The strength of a signal is how saliently it supports a specific hypothesis, as opposed to its weight, which is its predictive validity. We find that the strength-weight bias affects expectations, but that its magnitude is three times lower than originally reported in the psychology literature. This suggests that its impact on financial markets is likely to be smaller than originally thought.
OriginalsprogEngelsk
Udgivelses stedwww
UdgiverSSRN: Social Science Research Network
Antal sider37
DOI
StatusUdgivet - 2014

Emneord

  • Behavioral biases
  • Experimental finance
  • Market efficiency

Citer dette

Antoniou, C., Harrison, G. W., Lau, M. I., & Read, D. (2014). Information Characteristics and Errors in Expectations: Experimental Evidence. www: SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.2484596
Antoniou, Constantinos ; Harrison, Glenn W. ; Lau, Morten Igel ; Read, Daniel. / Information Characteristics and Errors in Expectations : Experimental Evidence. www : SSRN: Social Science Research Network, 2014.
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Antoniou, C, Harrison, GW, Lau, MI & Read, D 2014 'Information Characteristics and Errors in Expectations: Experimental Evidence' SSRN: Social Science Research Network, www. https://doi.org/10.2139/ssrn.2484596

Information Characteristics and Errors in Expectations : Experimental Evidence. / Antoniou, Constantinos; Harrison, Glenn W.; Lau, Morten Igel; Read, Daniel.

www : SSRN: Social Science Research Network, 2014.

Publikation: Working paperForskningpeer review

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N2 - Behavioural finance theories draw on evidence from psychology that suggest that some people respond to information in a biased manner, and construct theories of inefficient markets. However, these biases are not always robust when tested in economic conditions, which casts doubt on their relevance to market efficiency. We design an economic experiment to test a psychological hypothesis of errors in expectations widely cited in finance, which states that, in violations of Bayes Rule, some people respond more forcefully to the strength of an information signal. The strength of a signal is how saliently it supports a specific hypothesis, as opposed to its weight, which is its predictive validity. We find that the strength-weight bias affects expectations, but that its magnitude is three times lower than originally reported in the psychology literature. This suggests that its impact on financial markets is likely to be smaller than originally thought.

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Antoniou C, Harrison GW, Lau MI, Read D. Information Characteristics and Errors in Expectations: Experimental Evidence. www: SSRN: Social Science Research Network. 2014. https://doi.org/10.2139/ssrn.2484596