Adaptive Expectations, Confirmatory Bias, and Informational Efficiency
AbstractWe study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents' expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsen the information efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of the confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other's effect, thus increasing the informational efficiency.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1009.5075.
Date of creation: Sep 2010
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-CBE-2010-10-09 (Cognitive & Behavioural Economics)
- NEP-CTA-2010-10-09 (Contract Theory & Applications)
- NEP-MIC-2010-10-09 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blouin, Max R & Serrano, Roberto, 2001.
"A Decentralized Market with Common Values Uncertainty: Non-Steady States,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(2), pages 323-46, April.
- Max Blouin & Roberto Serrano, 1998. "A Decentralized Market with Common Values Uncertainty: Non-Steady States," Working Papers 98-5, Brown University, Department of Economics, revised 10 Aug 1998.
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