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Uncertainty, Anchoring, and Expectations Formation: Experimental Evidence​

Author

Listed:
  • Benjamin E. Radoc, Jr.

    (Bangko Sentral ng Pilipinas)

  • Sarah Lynne S. Daway-Ducanes

    (University of the Philippines School of Economics)

Abstract

The important role of expectations in intertemporal decision making has long been recognized but disagreement among economists on how expectations are formed persists. We conducted an online learning to forecast experiment to determine the impact of uncertainty (in terms of market volatility and number of players) and anchoring (or a non-binding target price band) on the quality of price forecasts. We find that forecast errors are significantly higher in more volatile markets; lower in the presence of a non-binding price bandwidth, suggesting an anchoring effect on expectations; and lower in later markets, confirming the importance of learning and e xperience. Employing a two-step system generalized method of moments, we further confirm these results, and also find that players make systematic forecast errors, in contrast to what is predicted by rational expectations hypothesis.

Suggested Citation

  • Benjamin E. Radoc, Jr. & Sarah Lynne S. Daway-Ducanes, 2025. "Uncertainty, Anchoring, and Expectations Formation: Experimental Evidence​," BSP Discussion Paper Series 202504, Bangko Sentral ng Pilipinas.
  • Handle: RePEc:bhd:dpaper:202504
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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