A Mind Is a Terrible Thing to Change: Confirmatory Bias in Financial Markets

Sebastien Pouget, Julien Sauvagnat and Stephane Villeneuve

The Review of Financial Studies, 2017, vol. 30, issue 6, 2066-2109

Abstract: This paper studies the impact of the confirmatory bias on financial markets. We propose a model in which some traders may ignore new evidence inconsistent with their favorite hypothesis regarding the state of the world. The confirmatory bias provides a unified rationale for several existing stylized facts, including excess volatility, excess volume, and momentum. It also delivers novel predictions for which we find empirical support using data on analysts’ earnings forecasts: traders update beliefs depending on the sign of past signals and previous beliefs, and, at the stock level, differences of opinion are larger when past signals have different signs.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (26)

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