Johnson, Samuel Gregory Blane;
Tuckett, David;
(2022)
Narrative Expectations in Financial Forecasting.
Center for Open Science: Charlottesville (VA), USA.
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Abstract
How do people form expectations about the future? We use amateur and expert investors' expectations about financial asset prices to study this question. Three experiments contrast the rational expectations assumption from neoclassical economics (investors forecast according to neoclassical financial theory) against two psychological theories of expectation formation—behaviorally informed expectations (investors understand empirical market anomalies and expect these anomalies to occur) and narrative expectations (investors use narrative thinking to predict future prices). Whereas neoclassical financial theory maintains that past public information cannot be used to predict future prices, participants used company performance information revealed before a base price quotation to project future price trends after that quotation (Experiment 1), contradicting rational expectations. Importantly, these projections were stronger when information concerned predictions about a company's future performance rather than actual data about its past performance, suggesting that people not only rely on financially irrelevant (but narratively relevant) information for making predictions but erroneously impose temporal order on that information. These biased predictions had downstream consequences for asset allocation choices (Experiment 2), and these choices were driven in part by affective reactions to the company performance news (Experiment 3). There were some mild effects of expertise, but overall the effects of narrative appear to be consistent across all levels of expertise studied, including professional financial analysts. We conclude by discussing the prospects for a narrative theory of choice that provide new microfoundational insights about economic behavior.
| Type: | Working / discussion paper |
|---|---|
| Title: | Narrative Expectations in Financial Forecasting |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.31234/osf.io/safg6 |
| Publisher version: | https://doi.org/10.31234/osf.io/safg6 |
| Language: | English |
| Additional information: | © 2022 Center for Open Science. Original content in this paper is licensed under the terms of the Creative Commons Attribution 4.0 International (CC BY 4.0) Licence (https://creativecommons.org/licenses/by/4.0/). |
| Keywords: | behavioral decision-making, expectations, experimental finance, intuitive theories, narratives |
| UCL classification: | UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences > Div of Psychology and Lang Sciences > Clinical, Edu and Hlth Psychology UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences UCL UCL > Provost and Vice Provost Offices > School of Life and Medical Sciences > Faculty of Brain Sciences > Div of Psychology and Lang Sciences |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10149672 |
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