The latest research of Dr. Yaron Lahav of the GGFBM Department of Business Administration, has been accepted for publication in the prestigious Journal of Financial and Quantitative Analysis. The study Heterogeneity of Beliefs and Trade in Experimental Asset examines investor behavior, particularly expectations, in economic choices such as asset trading. There is an “assumption that individual expectations and actions are aligned. So far, empirical evidence supporting these conjectures is scarce and a direct test seems overdue."
Using experimental data, Yaron and his research associates investigate the relationship between traders' expectations and market outcomes. The data show that those who have high price expectations buy more frequently and submit higher bids, and those who hold low price expectations sell more frequently and submit lower bids. Traders who have more accurate expectations achieve greater earnings. Simulations using only belief data reproduce the pricing patterns observed in the market well, indicating that the heterogeneity of expectations is a key to explaining market activity.
“In the field, heterogeneous beliefs can result from different types of available information, or from different interpretation of the same information. Therefore, the controlled test of homogeneous beliefs in the laboratory is meaningful. In the experiment, individuals face the same instructions and receive the same information. Under these conditions…one would assume that the beliefs of subjects must be homogeneous, but they are not. Individual beliefs are heterogeneous in each period and market. Even with repetition, beliefs seem not to converge although belief dispersion decreases over time. As heterogeneity of beliefs persist, we find that markets are not able to homogenize expectations and do not lead to a no-trade equilibrium."
