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

73 Pages Posted: 3 Nov 2023 Last revised: 28 Nov 2023

See all articles by Huseyin Gulen

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University; Purdue University - Krannert School of Management

Chan Lim

University at Buffalo (SUNY) - School of Management

Date Written: November 22, 2023

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

Suggested Citation

Gulen, Huseyin and Lim, Chan, Decoding Expectation Formation from Realized Stock Prices: An Eye-Tracking Study (November 22, 2023). Available at SSRN: https://ssrn.com/abstract=4610951 or http://dx.doi.org/10.2139/ssrn.4610951

Huseyin Gulen

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Chan Lim (Contact Author)

University at Buffalo (SUNY) - School of Management ( email )

255 Jacobs Management Center
Buffalo, NY 14260
United States

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