Skip to content Skip to navigation
University of Warwick
  • Study
  • |
  • Research
  • |
  • Business
  • |
  • Alumni
  • |
  • News
  • |
  • About

University of Warwick
Publications service & WRAP

Highlight your research

  • WRAP
    • Home
    • Search WRAP
    • Browse by Warwick Author
    • Browse WRAP by Year
    • Browse WRAP by Subject
    • Browse WRAP by Department
    • Browse WRAP by Funder
    • Browse Theses by Department
  • Publications Service
    • Home
    • Search Publications Service
    • Browse by Warwick Author
    • Browse Publications service by Year
    • Browse Publications service by Subject
    • Browse Publications service by Department
    • Browse Publications service by Funder
  • Help & Advice
University of Warwick

The Library

  • Login
  • Admin

Narrative expectations in financial forecasting

Tools
- Tools
+ Tools

Johnson, Samuel G. B. and Tuckett, David (2022) Narrative expectations in financial forecasting. Journal of Behavioral Decision Making, 35 (1). e2245. doi:10.1002/bdm.2245

[img]
Preview
PDF
WRAP-narrative-expectations-financial-forecasting-Johnson-2021.pdf - Published Version - Requires a PDF viewer.
Available under License Creative Commons Attribution 4.0.

Download (1080Kb) | Preview
[img] PDF
Narrative Forecasting JBDM Final.pdf - Accepted Version
Embargoed item. Restricted access to Repository staff only - Requires a PDF viewer.

Download (871Kb)
Official URL: https://doi.org/10.1002/bdm.2245

Request Changes to record.

Abstract

How do people form expectations about the future? We use amateur and expert investors’ expectations about financial asset prices to study this question. Three experiments contrast the rational expectations assumption from neoclassical economics (investors forecast according to neoclassical financial theory) against two psychological theories of expectation-formation—behaviorally-informed expectations (investors understand empirical market anomalies and expect these anomalies to occur) and narrative expectations (investors use narrative thinking to predict future prices). Whereas neoclassical financial theory maintains that past public information cannot be used to predict future prices, participants used company performance information revealed before a base price quotation to project future price trends after that quotation (Experiment 1), contradicting rational expectations. Importantly, these projections were stronger when information concerned predictions about a company’s future performance rather than actual data about its past performance, suggesting that people not only rely on financially irrelevant (but narratively relevant) information for making predictions, but erroneously impose temporal order on that information. These biased predictions had downstream consequences for asset allocation choices (Experiment 2) and these choices were driven in part by affective reactions to the company performance news (Experiment 3). There were some mild effects of expertise, but overall the effects of narrative appear to be consistent across all levels of expertise studied, including professional financial analysts. We conclude by discussing the prospects for a narrative theory of choice that provide new micro-foundational insights about economic behavior.

Item Type: Journal Article
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
Divisions: Faculty of Science, Engineering and Medicine > Science > Psychology
Library of Congress Subject Headings (LCSH): Decision making -- Economic aspects, Decision making -- Psychological aspects, Investments -- Decision making, Expectation (Psychology) , Business enterprises -- Finance, Business forecasting, Corporations -- Finance -- Forecasting
Journal or Publication Title: Journal of Behavioral Decision Making
Publisher: John Wiley & Sons Ltd.
ISSN: 0894-3257
Official Date: January 2022
Dates:
DateEvent
January 2022Published
26 March 2021Available
26 February 2021Accepted
Volume: 35
Number: 1
Article Number: e2245
DOI: 10.1002/bdm.2245
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
UNSPECIFIED[ESRC] Economic and Social Research Councilhttp://dx.doi.org/10.13039/501100000269
UNSPECIFIEDInstitute for New Economic Thinkinghttp://dx.doi.org/10.13039/100007695

Request changes or add full text files to a record

Repository staff actions (login required)

View Item View Item
twitter

Email us: wrap@warwick.ac.uk
Contact Details
About Us