Information Characteristics and Errors in Expectations: Experimental Evidence

Constantinos Antoniou, Glenn W. Harrison, Morten I. Lau, Daniel Read*

*Corresponding author for this work

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Abstract

We design an experiment to test the hypothesis that, in violation of Bayes' rule, some people respond more forcefully to the strength of information than to its weight. We provide incentives to motivate effort, use naturally occurring information, and control for risk attitude. We find that the strength-weight bias affects expectations but that its magnitude is significantly lower than originally reported. Controls for nonlinear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations.
Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Volume52
Issue number2
Pages (from-to)737-750
ISSN0022-1090
DOIs
Publication statusPublished - Apr 2017

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