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Follies subdued: Informational efficiency under adaptive expectations and confirmatory bias

Aldashev, G; Carletti, T; Righi, S; (2011) Follies subdued: Informational efficiency under adaptive expectations and confirmatory bias. Journal of Economic Behavior & Organization , 80 (1) pp. 110-121. 10.1016/j.jebo.2011.03.001. Green open access

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Abstract

We study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents’ expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsens the informational efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other’s effect, thus increasing informational efficiency.

Type: Article
Title: Follies subdued: Informational efficiency under adaptive expectations and confirmatory bias
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jebo.2011.03.001
Publisher version: https://doi.org/10.1016/j.jebo.2011.03.001
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: informational efficiency, confirmatory bias, agent-based models, asset pricing
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science
URI: https://discovery.ucl.ac.uk/id/eprint/10058692
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