Information Characteristics and Errors in Expectations: Experimental Evidence
27 Pages Posted: 12 Oct 2015
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: Suggested Citation