Information Characteristics and Errors in Expectations: Experimental Evidence

27 Pages Posted: 12 Oct 2015

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

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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 non-linear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations.

Keywords: behavioral biases, market efficiency, experimental finance

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. IZA Discussion Paper No. 9387, Available at SSRN: https://ssrn.com/abstract=2672173

Constantinos Antoniou (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
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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