 Follies subdued: Informational efficiency under adaptive expectations and confirmatory biasGani Aldashev, Timoteo Carletti and Simone Righi Journal of Economic Behavior & Organization, 2011, vol. 80, issue 1, 110-121 Abstract: We study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents’ expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsens the informational efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other’s effect, thus increasing informational efficiency. Keywords: Informational efficiency; Confirmatory bias; Agent-based models; Asset pricing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:80:y:2011:i:1:p:110-121 DOI: 10.1016/j.jebo.2011.03.001 Access Statistics for this article Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D. More articles in Journal of Economic Behavior & Organization from Elsevier |
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