Reading the market? Expectation coordination and theory of mind

Te Bao, Sascha Füllbrunn (), Jiaoying Pei and Jichuan Zong

Journal of Economic Behavior & Organization, 2024, vol. 219, issue C, 510-527

Abstract: Suppose that all asset market traders are proficient at reading the market. Would markets become more stable, resulting in lower volatility and fewer price bubbles? To answer this question, we test whether Theory of Mind (ToM) capabilities enhance expectation coordination and reduce expectation heterogeneity and price bubbles in learning-to-forecast experiments. We compare the price and expectation dynamics between markets composed of participants with either high or low ToM capabilities as measured by the eye gaze test. Despite an economically substantial difference between the two groups, we find no statistically significant differences in the measures of expectation coordination, price bubbles, market stability, and expectation heterogeneity.

Keywords: Theory of mind; Strategic uncertainty; Asset bubbles; Experimental Finance (search for similar items in EconPapers)
JEL-codes: C92 G17 G40 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:219:y:2024:i:c:p:510-527

DOI: 10.1016/j.jebo.2024.01.018

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