Aggregate Sentiment and Investment: An Experimental Study

65 Pages Posted: 28 Jul 2017 Last revised: 10 Aug 2017

See all articles by Donja Darai

Donja Darai

University of Zurich - Department of Economics

Shimon Kogan

IDC Herzliya - Arison School of Business; University of Pennsylvania - The Wharton School

Anthony M. Kwasnica

Smeal College of Business

Roberto A. Weber

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 4, 2017

Abstract

Sentiment indices, such as measures of consumer confidence, are often discussed as potential indicators of future investment, consumption and growth. However, documenting a causal relationship between consumer confidence and output — and understanding the precise nature of the relationship — using field data has been challenging. We rely on the high degree of control afforded by a laboratory setting to experimentally test a simple model of investment with complementarities and time-varying fundamentals. Our experiment manipulates the presence of aggregate confidence measures to test both how they reflect available information and how they influence future output. We find that an aggregate sentiment measure can be as effective as a highly precise exogenous public signal in coordinating behavior on more efficient equilibria. Furthermore, our analysis indicates that the confidence measure also impacts expectations by influencing beliefs about aggregate investment.

Keywords: consumer sentiment, expectations, coordination, global games

JEL Classification: C72, C92, D84

Suggested Citation

Darai, Donja and Kogan, Shimon and Kwasnica, Anthony Mark and Weber, Roberto A., Aggregate Sentiment and Investment: An Experimental Study (August 4, 2017). Available at SSRN: https://ssrn.com/abstract=3008722 or http://dx.doi.org/10.2139/ssrn.3008722

Donja Darai

University of Zurich - Department of Economics ( email )

Bluemlisalpstrasse 10
Zurich, 8006
Switzerland

Shimon Kogan (Contact Author)

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Anthony Mark Kwasnica

Smeal College of Business ( email )

Department of Risk Management
332 Business Building
University Park, PA 16802-3306
United States

Roberto A. Weber

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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