The Credibility Effect and Rational Expectations: Implications of the Gramlich Study

macroeconomics, price shocks

Short sale constraints, divergence of opinion and asset values: evidence from the laboratory

The overvaluation hypothesis (Miller 1977) predicts that a) stocks are overvalued in the presence of short selling restrictions and that b) the overvaluation increases in the degree of divergence of opinion. We design an experiment that allows us to test these predictions in the laboratory. The results indicate that prices are higher with short selling constraints, but the overvaluation does not increase in the degree of divergence of opinion. We further find that trading volume is lower and bid-ask spreads are higher when short sale restrictions are imposed. JEL Classification: C92, G14 Keywords: Overvaluation Hypothesis , Short Selling Constraints , Divergence of Opinio

Causes, consequences, and cures of myopic loss aversion - An experimental investigation

Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility

Cooperation in local and global groups

Multiple group memberships are the rule rather than the exception. Locally operating groups frequently offer the advantage of providing social recognition and higher marginal benefits to the individual, whereas globally operating groups may be more beneficial from a social perspective. Within a voluntary contribution environment we experimentally investigate the tension that arises when subjects belong to a smaller local and a larger global group. When the global public good is more efficient individuals first attempt to cooperate in the global public good. However, this tendency quickly unravels and cooperation in the local public good builds up

Meatpacking’s Human Toll

[Excerpt] The meatpacking industry has shown little inclination to respect its workers\u27 rights on its own. Congress and the Bush administration should take decisive steps to protect the lives and well-being of these men and women. But they are unlikely to act until consumers demand meat that is not tainted by workers\u27 blood, sweat and fear

Exponential decay towards equilibrium and global classical solutions for nonlinear reaction-diffusion systems

We consider a system of reaction-diffusion equations describing the reversible reaction of two species $\mathcal{U}, \mathcal{V}$ forming a third species $\mathcal{W}$ and vice versa according to mass action law kinetics with arbitrary stochiometric coefficients (equal or larger than one). Firstly, we prove existence of global classical solutions via improved duality estimates under the assumption that one of the diffusion coefficients of $\mathcal{U}$ or $\mathcal{V}$ is sufficiently close to the diffusion coefficient of $\mathcal{W}$. Secondly, we derive an entropy entropy-dissipation estimate, that is a functional inequality, which applied to global solutions of these reaction-diffusion system proves exponential convergence to equilibrium with explicit rates and constants.Comment: 24 page

Overweighting Private Information: Three Measures, One Bias?

Overweighting private information is often used to explain various detrimental decisions. In behavioral economics and finance, it is usually modeled as a direct consequence of misperceiving signal reliability. This bias is typically dubbed overconfidence and linked to the judgment literature in psychology. Empirical tests of the models often fail to find evidence for the predicted effects of overconfidence. These studies assume, however, that a specific type of overconfidence, i.e., "miscalibration," captures the underlying trait. We challenge this assumption and borrow the psychological methodology of single-cue probability learning to obtain a direct measure for overweighting private information. We find that overweighting private information and measures of "miscalibration" are unrelated, indicating that different kinds of misperceptions are at work. Thus, in order to test the theoretical predictions of the overconfidence literature in economics and finance, one cannot rely on the well-established "miscalibration" bias. We find no gender differences in overconfidence for our measures except for one, where women are more overconfident than men.overconfidence, miscalibration, signal perception, cognitive bias