Uncertainty, Anchoring, and Expectations Formation: Experimental Evidence​

Benjamin Radoc, Jr. and Sarah Lynne Daway-Ducanes
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Benjamin Radoc, Jr.: Bangko Sentral ng Pilipinas
Sarah Lynne Daway-Ducanes: University of the Philippines School of Economics

No 202504, BSP Discussion Paper Series from Bangko Sentral ng Pilipinas

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.

JEL-codes: C91 E31 E71 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2025-01
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Published as BSP Discussion paper No. 2025-04, January 2025

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Persistent link: https://EconPapers.repec.org/RePEc:bhd:dpaper:202504

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