Information Characteristics and Errors in Expectations: Experimental Evidence

38 Pages Posted: 23 Aug 2014 Last revised: 15 Oct 2014

See all articles by Constantinos Antoniou

Constantinos Antoniou

University of Warwick - Warwick Business School

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Morten I. Lau

Durham Business School

Daniel Read

University of Warwick - Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2014

Abstract

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.

Keywords: behavioral biases, experimental finance, market efficiency.

JEL Classification: D81, D84, G11

Suggested Citation

Antoniou, Constantinos and Harrison, Glenn William and Lau, Morten Igel and Read, Daniel, Information Characteristics and Errors in Expectations: Experimental Evidence (September 2014). Available at SSRN: https://ssrn.com/abstract=2484596 or http://dx.doi.org/10.2139/ssrn.2484596

Constantinos Antoniou (Contact Author)

University of Warwick - Warwick Business School ( email )

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United Kingdom

Glenn William Harrison

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
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HOME PAGE: http://www.cear.gsu.edu/

Morten Igel Lau

Durham Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Daniel Read

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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