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Information Characteristics and Errors in Expectations: Experimental Evidence

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  • Antoniou, Constantinos

    (University of Warwick)

  • Harrison, Glenn

    (Georgia State University, CEAR)

  • Lau, Morten

    (Copenhagen Business School)

  • Read, Daniel

    (University of Warwick)

Abstract

We design an experiment to test the hypothesis that, in violation of Bayes Rule, some people respond more forcefully to the strength of information than to its weight. We provide incentives to motivate effort, use naturally occurring information, and control for risk attitude. We find that the strength-weight bias affects expectations, but that its magnitude is significantly lower than originally reported. Controls for non-linear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations.

Suggested Citation

  • Antoniou, Constantinos & Harrison, Glenn & Lau, Morten & Read, Daniel, 2015. "Information Characteristics and Errors in Expectations: Experimental Evidence," IZA Discussion Papers 9387, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9387
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    3. Mohrschladt, Hannes & Langer, Thomas, 2020. "Biased information weight processing in stock markets," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 89-106.
    4. Flores-Szwagrzak, Karol, 2022. "Learning by Convex Combination," Working Papers 16-2022, Copenhagen Business School, Department of Economics.
    5. Ambuehl, Sandro & Li, Shengwu, 2018. "Belief updating and the demand for information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 21-39.

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    More about this item

    Keywords

    behavioral biases; market efficiency; experimental finance;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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