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Bubbles, Human Judgment, and Expert Opinion

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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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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Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997. "A Model of Investor Sentiment," NBER Working Papers 5926, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.
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