Evolution of subjective hurricane risk perceptions: A Bayesian approach
AbstractHow do decision makers weight private and official information sources which are correlated and differ in accuracy and bias? This paper studies how traders update subjective risk perceptions after receiving expert opinions, using a unique data set from a prediction market, the Hurricane Futures Market (HFM). We derive a theoretical Bayesian framework which predicts how traders update the probability of a hurricane making landfall in a certain range of coastline, after receiving correlated track forecast information from official and unofficial sources. Our results suggest that traders behave in a way not inconsistent with Bayesian updating but this behavior is based on the perceived quality of the information received. Official information sources are discounted when a perception of bias and credible alternatives exist.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 81 (2012)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jebo
Risk perceptions; Correlated information; Bayesian learning; Event markets; Prediction markets; Favorite-longshot bias; Hurricanes;
Other versions of this item:
- David Kelly & David Letson & Forest Nelson & David S. Nolan & Daniel Solis, 2009. "Evolution of Subjective Hurricane Risk Perceptions: A Bayesian Approach," Working Papers 0905, University of Miami, Department of Economics.
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
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