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Do Asset Market Prices Reflect Traders' Judgment Biases?

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  • Ganguly, Ananda R
  • Kagel, John H
  • Moser, Donald V

Abstract

The existence of base rate fallacy (BRF) bias is explored employing: (i) a context treatment with a narrative story applied to asset markets and (ii) an isomorphic abstract setting using balls-and-bingo cages. Probability estimates reflect a BRF bias in both treatments, but is stronger with context. Prices track highest expected dividend values (HEDVs) with context, resulting in strongly biased prices relative to the Bayesian norm when biased traders have HEDVs. In the abstract treatment prices do not track HEDVs nearly as closely, resulting in prices closer to the BRF bias only when most traders hold biased beliefs. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Ganguly, Ananda R & Kagel, John H & Moser, Donald V, 2000. "Do Asset Market Prices Reflect Traders' Judgment Biases?," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 219-245, May.
  • Handle: RePEc:kap:jrisku:v:20:y:2000:i:3:p:219-45
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    2. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 537-557.
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    Cited by:

    1. Jason Shachat & Anand Srinivasan, 2011. "Informational Price Cascades and Non-aggregation of Asymmetric Information in Experimental Asset Markets," Working Papers 1102, Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory, revised 14 Apr 2011.
    2. Frey, Bruno S. & Gallus, Jana, 2014. "Aggregate effects of behavioral anomalies: A new research area," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-15.
    3. Berg, Nathan & Biele, Guido & Gigerenzer, Gerd, 2010. "Does consistency predict accuracy of beliefs?: Economists surveyed about PSA," MPRA Paper 26590, University Library of Munich, Germany.
    4. Theo Offerman, 2002. "Efficiency in Auctions with Private and Common Values: An Experimental Study," American Economic Review, American Economic Association, vol. 92(3), pages 625-643, June.
    5. 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.
    6. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 163-183, September.
    7. Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 43-66, Fall.
    8. Enke, Benjamin & Zimmermann, Florian, 2013. "Correlation Neglect in Belief Formation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79900, Verein für Socialpolitik / German Economic Association.
    9. Ackert, Lucy F. & Kluger, Brian D. & Qi, Li, 2012. "Irrationality and beliefs in a laboratory asset market: Is it me or is it you?," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 278-291.
    10. Gary Charness & Edi Karni & Dan Levin, 2007. "Individual and group decision making under risk: An experimental study of Bayesian updating and violations of first-order stochastic dominance," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 129-148, October.
    11. Enke, Benjamin & Zimmermann, Florian, 2013. "Correlation Neglect in Belief Formation," IZA Discussion Papers 7372, Institute for the Study of Labor (IZA).
    12. Chewning, Eugene Jr. & Coller, Maribeth & Tuttle, Brad, 2004. "Do market prices reveal the decision models of sophisticated investors?: Evidence from the laboratory," Accounting, Organizations and Society, Elsevier, vol. 29(8), pages 739-758, November.
    13. Ying Luo, Guo, 2013. "Can representativeness heuristic traders survive in a competitive securities market?," Journal of Financial Markets, Elsevier, vol. 16(1), pages 152-164.

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