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Information Characteristics and Errors in Expectations: Experimental Evidence

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

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.

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Copyright
Corresponding author
* Antoniou (corresponding author), constantinos.antoniou@wbs.ac.uk, Read, daniel.read@wbs.ac.uk, Warwick Business School, University of Warwick; Harrison, gharrison@gsu.edu, Robinson College of Business, Georgia State University; and Lau, mla.eco@cbs.dk, Copenhagen Business School and Durham University Business School, Durham University. Harrison is also affiliated with the School of Economics, University of Cape Town.
Footnotes
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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.

Footnotes
References
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