A test of the rational expectations hypothesis using data from a natural experiment

Conte, A., Moffatt, P.G., Botti, F., Di Cagno, D.T. and D’Ippoliti, C. 2012. A test of the rational expectations hypothesis using data from a natural experiment. Applied Economics. 44 (35), pp. 4661-4678.

TitleA test of the rational expectations hypothesis using data from a natural experiment
AuthorsConte, A., Moffatt, P.G., Botti, F., Di Cagno, D.T. and D’Ippoliti, C.
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.

JournalApplied Economics
Journal citation44 (35), pp. 4661-4678
ISSN0003-6846
Year2012
PublisherRoutledge
Digital Object Identifier (DOI)doi:10.1080/00036846.2011.597734
Publication dates
Published2012

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