Decoding Expectation Formation from Realized Stock Prices: An Eye-Tracking Study

Abstract

We conduct an eye-tracking study to explore how investors allocate their attention across a price chart while predicting future stock prices. We confirm that attention allocation reflects expectation formation based on historical prices, as measures based on eye-tracking predict the forecasts submitted by subjects. Subjects rely on their perceptions of past trends and price levels when making forecasts. Recent and extreme returns, as well as price peaks and troughs, receive greater weight. Such heuristics are heterogeneous across subjects and result in inferior forecast performance. Our results provide neural evidence on beliefs about historical prices hypothesized by behavioral expectation models.

Keywords: Expectation, Belief, Eye Tracking, Attention, Experimental Finance

JEL Classification: D84, D87, D91, G41