A Test of the Rational Expectations Hypothesis using data froma Natural Experiment

Data on contestants’ choices in Italian Game Show Affari Tuoi are analysed in a way that separatesthe effect of risk attitude (preferences) from that of beliefs concerning the amount ofmoney that will be offered to contestants in future rounds. The most important issue addressedin the paper is what belief function is actually being used by contestants. The parameters of thisfunction are estimated freely along with the parameters of a choice model. Separate identificationof the belief function and preferences is possible by virtue of the fact that at a certain stageof the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rationalexpectations hypothesis is tested by comparing the estimated belief function with the“true” offer function which is estimated using data on offers actually made to contestants. Wefind that there is a significant difference between these two functions, and hence we reject therational expectations hypothesis.[...]

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Year of publication:	2009
Authors:	Del Conte, Anna ; Moffatt, Peter G. ; Di Cagno, Daniela T. ; Botti, Fabrizio ; D´Ippoliti, Carlo
Institutions:	Max-Planck-Institut für Ökonomik <Jena> / Abteilung Strategische Interaktion
Subject:	Entscheidungstheorie \| decision theory \| Monte-Carlo-Simulation \| Rationalität \| rational behaviour \| Auswahl \| rational choice \| Risikobereitschaft

1. Introduction
2. The game
3. Modelling choice rules
4. The econometric choice model
5. Estimation of the choice model and a test of rational expectations
6. A “rule of thumb” belief function6. A “rule of thumb” belief function
7. Introducing randomness in contestants’ beliefs
8. A mixture model of myopic and forward-looking behaviour
9. Conclusion
Appendix 1: Monte Carlo Simulation
Appendix 2: Modelling the Banker’s Offer function
References

Persistent link: https://ebvufind01.dmz1.zbw.eu/10009022166