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What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets

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  • Ackert, Lucy F.
  • Church, Bryan K.
  • Zhang, Ping

Abstract

This study uses experimental asset markets to investigate the effects of experience and common knowledge on a market's ability to adjust for optimistic forecast bias. As a baseline, we find that period-end prices reflect unbiased forecasts in markets with private information and inexperienced traders. With low bias forecasts, traders need experience before price adjusts for the bias. With high bias forecasts, traders need experience and public forecast releases before price adjusts for the bias. Overall, our findings provide insight into identifying conditions that are critical for the full revelation of biased, imperfect forecasts and provide direction for future theoretical work.

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  • Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2008. "What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 358-372, May.
  • Handle: RePEc:eee:jeborg:v:66:y:2008:i:2:p:358-372
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    1. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    2. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.

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