Reading the Market? Expectation Coordination and Theory of Mind

52 Pages Posted: 19 May 2022 Last revised: 2 Dec 2022

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics

Sascha Füllbrunn

Radboud University Nijmegen - Institute for Management Research

Jiaoying Pei

Division of Economics, School of Social Sciences, NEWRI-EPMC, Interdisciplinary Graduate Programme, Nanyang Technological University; Nanyang Technological University (NTU), School of Humanities & Social Sciences, Division of Economics, Students

Jichuan Zong

School of Finance and Laboratory of Experimental Economics

Date Written: May 17, 2022

Abstract

Does the ability to ‘read the market’ affect equilibrium formation in asset markets? To answer this question, we conducted pre-registered learning to forecast experiments with market groups composed of either subjects with high or low Theory of Mind (ToM) capabilities, elicited via the eye gaze test. On the aggregate level, we find the markets with the highest ToM capabilities to form a price bubble that is about 40% smaller and coordinates better at about 75% on the price forecasts, compared to the group with the lowest ToM capabilities. However, we fail to find a significant effect between those groups comparing price and expectation dynamics.

Keywords: Theory of Mind, Strategic Uncertainty, Asset Bubbles, Experimental Finance

JEL Classification: C92, G40, G17

Suggested Citation

Bao, Te and Füllbrunn, Sascha and Pei, Jiaoying and Zong, Jichuan, Reading the Market? Expectation Coordination and Theory of Mind (May 17, 2022). Available at SSRN: https://ssrn.com/abstract=4112058 or http://dx.doi.org/10.2139/ssrn.4112058

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Sascha Füllbrunn

Radboud University Nijmegen - Institute for Management Research ( email )

Heyendaalseweg 141
Nijmegen, 6525 AJ
Netherlands

HOME PAGE: http://www.ru.nl/english/people/fullbrunn-s/

Jiaoying Pei

Division of Economics, School of Social Sciences, NEWRI-EPMC, Interdisciplinary Graduate Programme, Nanyang Technological University ( email )

14 Nanyang Drive
Singapore, 639798
Singapore

Nanyang Technological University (NTU), School of Humanities & Social Sciences, Division of Economics, Students ( email )

14 Nanyang Drive
Singapore
Singapore

Jichuan Zong

School of Finance and Laboratory of Experimental Economics ( email )

217 Jianshan St,
Shahekou
Dalian, Liaoning
China

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