Do Asset Market Prices Reflect Traders' Judgment Biases?

Ananda Ganguly, John Kagel and Donald Moser

Journal of Risk and Uncertainty, 2000, vol. 20, issue 3, 219-245

Abstract: The existence of base rate fallacy (BRF) bias is explored employing: (i) a context treatment with a narrative story applied to asset markets and (ii) an isomorphic abstract setting using balls-and-bingo cages. Probability estimates reflect a BRF bias in both treatments, but is stronger with context. Prices track highest expected dividend values (HEDVs) with context, resulting in strongly biased prices relative to the Bayesian norm when biased traders have HEDVs. In the abstract treatment prices do not track HEDVs nearly as closely, resulting in prices closer to the BRF bias only when most traders hold biased beliefs. Copyright Kluwer Academic Publishers 2000

Keywords: asset markets; base rate fallacy; overreaction; Bayesian norm; experiment (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (21)

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DOI: 10.1023/A:1007848013750

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