Do Asset Market Prices Reflect Traders' Judgment Biases?

Journal of Risk and Uncertainty, Vol. 20, No.3, pp. 219-245, 2000

Posted: 5 Dec 2006

See all articles by Ananda R. Ganguly

Ananda R. Ganguly

Claremont McKenna College - Robert Day School of Economics and Finance

John H. Kagel

Ohio State University (OSU) - Economics

Donald V. Moser

University of Pittsburgh - Accounting Group

Abstract

The existence of base rate fallacy (BRF) bias is explored employing: (i) a context treatment with a narrative story applied to asset markets and (ii) an isomorphic abstract setting using balls-and-bingo cages. Probability estimates reflect a BRF bias in both treatments, but is stronger with context. Prices track highest expected dividend values (HEDVs) with context, resulting in strongly biased prices relative to the Bayesian norm when biased traders have HEDVs. In the abstract treatment prices do not track HEDVs nearly as closely, resulting in prices closer to the BRF bias only when most traders hold biased beliefs.

Keywords: asset markets, base rate fallacy, overreaction, Bayesian norm, experiment, optimism, pessimism

JEL Classification: G12, D84, C11, C91, C92, D70, E30, G14

Suggested Citation

Ganguly, Ananda Roop and Kagel, John H. and Moser, Donald V., Do Asset Market Prices Reflect Traders' Judgment Biases?. Journal of Risk and Uncertainty, Vol. 20, No.3, pp. 219-245, 2000, Available at SSRN: https://ssrn.com/abstract=949490

Ananda Roop Ganguly (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth Street
Claremont, CA 91711
United States
(909) 607-0720 (Phone)
(909) 621-8249 (Fax)

HOME PAGE: http://www.claremontmckenna.edu/academic/faculty/profile.asp?Fac=519

John H. Kagel

Ohio State University (OSU) - Economics ( email )

1945 North High Street
Columbus, OH 43210-1172
United States

Donald V. Moser

University of Pittsburgh - Accounting Group ( email )

264 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1726 (Phone)
412-648-1693 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
825
PlumX Metrics