Predicting the next step of a random walk: experimental evidence of regime-shifting beliefs

Predicting the next step of a random walk: experimental evidence of regime-shifting beliefs Barberis et al. (J. Financial Econ. 49 (1998) 307), construct a model in which investors use the prevalence of past trend reversals as an indicator of the likelihood of future reversals. While such “regime-shifting” beliefs are consistent with a variety of psychological theories, other contrary predictions are consistent with the same theories. We report two experiments with MBA-student participants that strongly support the existence of regime-shifting beliefs. We conclude that regime-shifting models can provide a useful framework for understanding market anomalies, including underreactions to earnings changes and overreactions to long-term earnings trends. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Predicting the next step of a random walk: experimental evidence of regime-shifting beliefs

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Publisher
Elsevier
Copyright
Copyright © 2002 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(02)00147-2
Publisher site
See Article on Publisher Site

Abstract

Barberis et al. (J. Financial Econ. 49 (1998) 307), construct a model in which investors use the prevalence of past trend reversals as an indicator of the likelihood of future reversals. While such “regime-shifting” beliefs are consistent with a variety of psychological theories, other contrary predictions are consistent with the same theories. We report two experiments with MBA-student participants that strongly support the existence of regime-shifting beliefs. We conclude that regime-shifting models can provide a useful framework for understanding market anomalies, including underreactions to earnings changes and overreactions to long-term earnings trends.

Journal

Journal of Financial EconomicsElsevier

Published: Sep 1, 2002

References

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