Theme 6: Experimental & Behavioural Economics – Articles + Reading
questions
Thaler 1987: Anomalies
Problems in problem solving:
Confirmation Bias people have the natural tendency to search for confirming rather than
disconfirming evidence this bias can be emphasised when unjustified assumptions make
disconfirming evidence seem unlikely
Anomaly a result inconsistent with the current economic theories and models (paradigm)
something that deviates from the standard/expected
In economics, most behaviour can be explained by assuming that agents make rational and
consistent choices
An anomalous result when an empirical result is difficult to ‘rationalize,’ or if implausible
assumptions are necessary to stay within the theories and models.
Sometimes, anomalies can be blamed on market failure and transaction costs.
Anomaly in Security Market firms with low-price earnings, small firms and firms that have lost
much value all earn returns higher than expected.
January effect seasonal patterns high average monthly return in January a big percentage of
the annual returns occurred in January equal-weighted index small firms have a greater weight
than their market value share.
stocks with negative returns over the previous year have higher returns in January.
Explanations of Anomalies not based on rational behaviour by all market participants.
Possible/Partial Explanation for January Effect tax-loss selling Firms that declined in value and
stock with negative returns over a previous year have higher returns in January.
January is special in some other suprising ways
a. Previous big winners have negative returns, losers have positive returns (concentrated in
January).
b. Dividends highest returns are associated with firms that pay no dividends (concentrated in
January)
Even if nobody could make money as a result of seasonal anomalies, one should still wonder why
these anomalies occur.
Tversky & Kahneman 1974: Judgement under uncertainty – Heuristics & Biases
Biases in judgements reveal some heuristics of thinking under uncertainty.
Many decisions are based on beliefs concerning the likelihood of uncertain events expressed as
odds or probabilities limited validity
“People rely on a limited number of heuristics principles which reduce the complex tasks (of making
judgements) to simpler judgmental operations.”
There are main types of heuristics that are employed in making judgements under uncertainty
Representativeness employed when people are asked to judge the probability than an
object or event A belongs to class or process B
Availability employed when people are asked to assess the frequency of a class or the
plausibility of a particular development
questions
Thaler 1987: Anomalies
Problems in problem solving:
Confirmation Bias people have the natural tendency to search for confirming rather than
disconfirming evidence this bias can be emphasised when unjustified assumptions make
disconfirming evidence seem unlikely
Anomaly a result inconsistent with the current economic theories and models (paradigm)
something that deviates from the standard/expected
In economics, most behaviour can be explained by assuming that agents make rational and
consistent choices
An anomalous result when an empirical result is difficult to ‘rationalize,’ or if implausible
assumptions are necessary to stay within the theories and models.
Sometimes, anomalies can be blamed on market failure and transaction costs.
Anomaly in Security Market firms with low-price earnings, small firms and firms that have lost
much value all earn returns higher than expected.
January effect seasonal patterns high average monthly return in January a big percentage of
the annual returns occurred in January equal-weighted index small firms have a greater weight
than their market value share.
stocks with negative returns over the previous year have higher returns in January.
Explanations of Anomalies not based on rational behaviour by all market participants.
Possible/Partial Explanation for January Effect tax-loss selling Firms that declined in value and
stock with negative returns over a previous year have higher returns in January.
January is special in some other suprising ways
a. Previous big winners have negative returns, losers have positive returns (concentrated in
January).
b. Dividends highest returns are associated with firms that pay no dividends (concentrated in
January)
Even if nobody could make money as a result of seasonal anomalies, one should still wonder why
these anomalies occur.
Tversky & Kahneman 1974: Judgement under uncertainty – Heuristics & Biases
Biases in judgements reveal some heuristics of thinking under uncertainty.
Many decisions are based on beliefs concerning the likelihood of uncertain events expressed as
odds or probabilities limited validity
“People rely on a limited number of heuristics principles which reduce the complex tasks (of making
judgements) to simpler judgmental operations.”
There are main types of heuristics that are employed in making judgements under uncertainty
Representativeness employed when people are asked to judge the probability than an
object or event A belongs to class or process B
Availability employed when people are asked to assess the frequency of a class or the
plausibility of a particular development
