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Information Characteristics and Errors in Expectations: Experimental Evidence

Published online by Cambridge University Press:  08 March 2017

Constantinos Antoniou ,
Glenn W. Harrison ,
Morten I. Lau  and
Daniel Read
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Abstract

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We design an experiment to test the hypothesis that, in violation of Bayes’ rule, some people respond more forcefully to the strength of information than to its weight. We provide incentives to motivate effort, use naturally occurring information, and control for risk attitude. We find that the strength–weight bias affects expectations but that its magnitude is significantly lower than originally reported. Controls for nonlinear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 2 , April 2017 , pp. 737 - 750
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We thank Elena Asparouhova (the referee), Hendrik Bessembinder (the editor), and conference and seminar participants at the 2012 Academy of Behavioral Finance and Economics (NYU-Poly), the 2010 Foundations and Applications of Utility, Risk and Decision Theory (Newcastle, U.K.), and Warwick Business School.

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