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A Test of the Rational Expectations Hypothesis using data from a Natural Experiment

Author

Listed:
  • Anna Conte

    (Strategic Interaction Group [Jena] - Max Planck Institute of Economics - Max-Planck-Gesellschaft)

  • Peter G. Moffatt

    (School of Economics - UEA - University of East Anglia [Norwich])

  • Fabrizio Botti
  • Daniela T. Di Cagno
  • Carlo d'Ippoliti

Abstract

Data on contestants' choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. This separate identification is possible by virtue of the fact that, at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the "true" offer function which is estimated extraneously using data on offers actually made to contestants. We find a close correspondence, leading us to accept the rational expectations hypothesis. The importance of belief-formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward-looking as opposed to myopic.

Suggested Citation

  • Anna Conte & Peter G. Moffatt & Fabrizio Botti & Daniela T. Di Cagno & Carlo d'Ippoliti, 2011. "A Test of the Rational Expectations Hypothesis using data from a Natural Experiment," Post-Print hal-00718703, HAL.
    • Handle: RePEc:hal:journl:hal-00718703
    DOI: 10.1080/00036846.2011.597734
    Note: View the original document on HAL open archive server: https://hal.science/hal-00718703
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    Cited by:

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    2. Philomena M. Bacon & Peter G. Moffatt, 2012. "Mortgage Choice as a Natural Field Experiment on Choice under Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1401-1426, October.

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    Keywords

    Social Sciences & Humanities;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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