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Investors' expectations: Measuring their nature and effect

Objective

The funded research investigates the role of expectations in financial decisions by asking two separate empirical questions. First, what systematic patterns appear in the expectations that the investor holds about relevant random variables? Second, can we establish that her expectations play a causal role for choices? The main tool in addressing these questions is the collection of data from laboratory experiments and large-sample household surveys. We also develop novel econometric methods and behavioral models of portfolio choice.

The majority of the planned studies add to the literature on biases in expectations. They conform to the revealed-expectations paradigm of expected utility, but ask whether the underlying expectations are suboptimal in predictable ways: (i) Are rational expectations violated systematically more in markets where agents need to make complicated inferences about fundamental information – e.g. where the inference occurs at the interim stage, before agents can observe realized prices and other agents’ choices (like in Rational Expectations Equilibrium)? (ii) Are agents able to successfully process the covariance of returns in portfolio-choice problems? (iii) Are investment herds excessively large and stable because people do not realize that other agents whom they observe also rely on others? (iv) Why do many people embark in risky gambling strategies under the false perception that they will stop after a few losses? The answers to these questions will contribute to the understanding of investment choices generally, and unnecessary risk exposure in particular.

In further studies, we ask about the causal link between expectations and choices. This will contribute to the evaluation of decision-theoretic models but can also inform economic policy, as the causal link from expectations to choices is an important component in the design of policy campaigns that work via affecting beliefs. We introduce artificially created instrumental variables into choice situations and use their exogenous influence to identify causal effects.

Call for proposal

ERC-2010-StG_20091209
See other projects for this call

Host institution

HUMBOLDT-UNIVERSITAET ZU BERLIN
Address
Unter Den Linden 6
10117 Berlin
Germany
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 380 235,37
Principal investigator
Georg Heinrich Weizsaecker (Prof.)
Administrative Contact
Ingmar Schmidt (Dr.)

Beneficiaries (7)

HUMBOLDT-UNIVERSITAET ZU BERLIN
Germany
EU contribution
€ 380 235,37
Address
Unter Den Linden 6
10117 Berlin
Activity type
Higher or Secondary Education Establishments
Principal investigator
Georg Heinrich Weizsaecker (Prof.)
Administrative Contact
Ingmar Schmidt (Dr.)
LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
United Kingdom
EU contribution
€ 73 056,83
Address
Houghton Street 1
WC2A 2AE London
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Maribel Glogowski (Ms.)
THE UNIVERSITY COURT OF THE UNIVERSITY OF ABERDEEN

Participation ended

United Kingdom
Address
King's College Regent Walk
AB24 3FX Aberdeen
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Crystal Anderson (Ms.)
DEUTSCHES INSTITUT FUR WIRTSCHAFTSFORSCHUNG DIW (INSTITUT FUR KONJUNKTURFORSCHUNG) EV
Germany
EU contribution
€ 438 534,54
Address
Mohrenstrasse 58
10117 Berlin
Activity type
Research Organisations
Administrative Contact
Meike Janssen (Ms.)
UCL Elizabeth Garrett Anderson Institute for Women’s Health

Participation ended

United Kingdom
EU contribution
€ 195 157,66
Address
Gower Street
WC1E 6BT London
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Greta Borg-Carbott (Ms.)
WISSENSCHAFTSZENTRUM BERLIN FUR SOZIALFORSCHUNG GGMBH
Germany
EU contribution
€ 82 291,20
Address
Reichpietschufer 50
10785 Berlin
Activity type
Research Organisations
Administrative Contact
Claudia Buchmann (Ms.)
THE UNIVERSITY COURT OF THE UNIVERSITY OF ST ANDREWS
United Kingdom
EU contribution
€ 53 054,40
Address
North Street 66 College Gate
KY16 9AJ St Andrews
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Trish Starrs (Ms.)