Do Asset Market Prices Reflect Traders' Judgment Biases?
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
Volume (Year): 20 (2000)
Issue (Month): 3 (May)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/11166/PS2|
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.:
- Anderson, Matthew J. & Sunder, Shyam, 1995.
"Professional Traders as Intuitive Bayesians,"
Organizational Behavior and Human Decision Processes,
Elsevier, vol. 64(2), pages 185-202, November.
- Anderson, M.J. & Sunder, S., 1989. "Professional Traders As Intuitive Bayesians," GSIA Working Papers 88-89-51, Carnegie Mellon University, Tepper School of Business.
- Anderson, M.J. & Sunder, S., 1995. "Professional Traders as Intuitive Bayesians," GSIA Working Papers 1995-05, Carnegie Mellon University, Tepper School of Business.
- Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
- Shefrin, Hersh & Statman, Meir, 1994. "Behavioral Capital Asset Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 323-349, September.
- 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.
- Grether, David M, 1978. "Recent Psychological Studies of Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 68(2), pages 70-74, May.
- Grether, David M., "undated". "Recent Psychological Studies of Behavior Under Uncertainty," Working Papers 82, California Institute of Technology, Division of the Humanities and Social Sciences.
- repec:hrv:faseco:30747159 is not listed on IDEAS
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.