Biased Information, Peer Pressure and Expectation Formation
Abstract:
The realization of efficient market relies on two assumptions: first, the information is diffused without distortions; second, investors are perfectly rational and therefore they can precisely interpret the received information and then react accordingly. Behavior economics has relaxed the assumption on perfect rationality and recognized the impact of psychological biases on the expectation formation. However, existing literature mainly postulates the unbiased information generated by information sources. In that sense, the information reporting behavior is hugely simplified. In this paper, we address this issue by simulating an agent-based computational model with the consideration of the diffusion of biased information and investigate its influence on expectation formation. Meanwhile, the peer pressure mechanism is introduced to depict the social learning behavior among investors. The preliminary results show that both the biased information and peer pressure have strong negative effects on expectation formation and decision-making.