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Bubbles, Human Judgment, and Expert Opinion

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Abstract

Research in psychology and behavioral finance is surveyed for evidence to what extent experts such as professional investment managers or endowment trustees may behave in such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses scholarly psychological literature on the representativeness heuristic, overconfidence, attentional anomalies, self-esteem, conformity pressures, salience and justification for insights into weaknesses in expert opinion. The role of the prudent person standard and the news media in influencing experts is considered. The relevance of the literature on testing of the efficient markets theory is discussed.

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File URL: http://cowles.econ.yale.edu/P/cd/d13a/d1303.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1303.

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Length: 17 pages
Date of creation: May 2001
Date of revision:
Publication status: Published in Financial Analysts Journal (May/June 2002), 58(3): 18–26; and in The ICFAI Journal of Behavioral Finance (India) (September 2004), 1(3): 7–17
Handle: RePEc:cwl:cwldpp:1303

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Keywords: Institutional investors; investment professionals; organizations; committees; stock market; speculative markets; behavioral finance; feedback; groupthink; representativeness; heuristic; conservatism; subjective probability; prudent person; standard; ERISA; news media; attention; efficient markets; conformity pressures; true uncertainty;

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  1. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
  2. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
  3. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
  4. Robert J. Shiller & John Pound, 1986. "Survey Evidence on Diffusion of Interest Among Institutional Investors," Cowles Foundation Discussion Papers 794, Cowles Foundation for Research in Economics, Yale University.
  5. Basu, Sanjoy, 1983. "The relationship between earnings' yield, market value and return for NYSE common stocks : Further evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 129-156, June.
  6. Peter M. deMarzo & Dimitri Vayanos & Jeffrey Zwiebel, 2000. "A Model of Persuasion - With Implications for Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1635, Econometric Society.
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Cited by:
  1. Glaser, Markus & Langer, Thomas & Weber, Martin, 2003. "On the Trend Recognition and Forecasting Ability of Professional Traders," CEPR Discussion Papers 3904, C.E.P.R. Discussion Papers.
  2. Herrera, Santiago & Perry, Guillermo, 2001. "Tropical bubbles : asset prices in Latin America, 1980-2001," Policy Research Working Paper Series 2724, The World Bank.
  3. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
  4. Bjuggren, Per-Olof & Wiberg, Daniel, 2005. "Industry Specific Effects in Investment Performance and Valuation of Firms - Marginal q in a Stock Market Bubble," Working Paper Series in Economics and Institutions of Innovation 45, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  5. Qin Xiao & Randolph Gee Kwang Tan, 2006. "Signal Extraction with Kalman Filter: A Study of the Hong Kong Property Price Bubbles," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 0601, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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