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Rational investor sentiment in a repeated stochastic game with imperfect monitoring

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  • Gerber, Anke
  • Hens, Thorsten
  • Vogt, Bodo
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    Abstract

    We consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection arguments either have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis, probability matching and overconfidence. Our results have interesting applications in finance because the observed equilibrium exhibits momentum, reversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 76 (2010)
    Issue (Month): 3 (December)
    Pages: 669-704

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    Handle: RePEc:eee:jeborg:v:76:y:2010:i:3:p:669-704

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    Web page: http://www.elsevier.com/locate/jebo

    Related research

    Keywords: Coordination games Behavioral equilibrium selection Experimental asset markets Behavioral finance Investor sentiment Technical analysis;

    References

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