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

Sébastien Pouget, Julien Sauvagnat and Stéphane Villeneuve
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Sébastien Pouget: TSM - Toulouse School of Management Research - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse
Stéphane Villeneuve: TSM - Toulouse School of Management Research - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse

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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

Keywords: G12; G14 (search for similar items in EconPapers)
Date: 2017-06-01
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Citations: View citations in EconPapers (19)

Published in Review of Financial Studies, 2017, 30 (6), pp.2066 - 2109. ⟨10.1093/rfs/hhw100⟩

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Journal Article: A Mind Is a Terrible Thing to Change: Confirmatory Bias in Financial Markets (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01698658

DOI: 10.1093/rfs/hhw100

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