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Associative memory, beliefs and market interactions

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  • Enke, Benjamin
  • Schwerter, Frederik
  • Zimmermann, Florian

Abstract

Recent theories and narratives highlight the potential role of associative recall in driving overreaction in expectations and market behavior. Based on a simple model, we test this idea through a series of experiments in which news are communicated with memorable contexts. Because the experimental participants predominantly remember those past news that get cued by new information, their beliefs about fundamentals strongly overreact. In a betting market experiment, associative recall translates into overreaction in market prices, which makes realized prices too extreme. Our results highlight the importance of associative memory for beliefs and financial decisions.

Suggested Citation

  • Enke, Benjamin & Schwerter, Frederik & Zimmermann, Florian, 2024. "Associative memory, beliefs and market interactions," Journal of Financial Economics, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:jfinec:v:157:y:2024:i:c:s0304405x2400076x
    DOI: 10.1016/j.jfineco.2024.103853
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    References listed on IDEAS

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    More about this item

    Keywords

    Beliefs; Expectations; Memory; Associations; Bounded rationality;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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