Rational investor sentiment in a repeated stochastic game with imperfect monitoring

Anke Gerber, Thorsten Hens and Bodo Vogt

Journal of Economic Behavior & Organization, 2010, vol. 76, issue 3, 669-704

Abstract: We consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection arguments either have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis, probability matching and overconfidence. Our results have interesting applications in finance because the observed equilibrium exhibits momentum, reversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style.

Keywords: Coordination; games; Behavioral; equilibrium; selection; Experimental; asset; markets; Behavioral; finance; Investor; sentiment; Technical; analysis (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:76:y:2010:i:3:p:669-704

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