Associative memory, beliefs and market interactions

Benjamin Enke, Frederik Schwerter and Florian Zimmermann

Journal of Financial Economics, 2024, vol. 157, issue C

Abstract: Recent theories and narratives highlight the potential role of associative recall in driving overreaction in expectations and market behavior. Based on a simple model, we test this idea through a series of experiments in which news are communicated with memorable contexts. Because the experimental participants predominantly remember those past news that get cued by new information, their beliefs about fundamentals strongly overreact. In a betting market experiment, associative recall translates into overreaction in market prices, which makes realized prices too extreme. Our results highlight the importance of associative memory for beliefs and financial decisions.

Keywords: Beliefs; Expectations; Memory; Associations; Bounded rationality (search for similar items in EconPapers)
JEL-codes: D01 (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:jfinec:v:157:y:2024:i:c:s0304405x2400076x

DOI: 10.1016/j.jfineco.2024.103853

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