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Cataloged Resource Summary

 

Title

Perceptions of Chance and the Efficient Market Hypothesis: A Classroom Experiment

Author

David J. Cooper

Categories

Information and Uncertainty
Financial Economics

Type

Non-computerized experiment

Description

The efficient market hypothesis is one of the most difficult concepts to teach undergraduate students. This difficulty arises from the false knowledge which students bring to the classroom. Many students are born chartists, like many members of the financial community, certain that predictable patterns exist in stock price data. Most likely these beliefs are due to an inability to distinguish correlated data from uncorrelated data, as observed in psychological studies of the hot hand fallacy and the gambler's fallacy. The classroom experiment described in this article is designed to illustrate students' misperceptions of chance. Students are asked to pick one of five sequences as being uncorrelated over time. The experiment is presented in terms of true/false exams, a natural context for students. Results are consistent with the psychological literature; the modal response is a sequence with slight negative autocorrelation. Follow-up questions and discussions are also described. These are designed to make connections between the experiment, the psychological literatures on perceptions of random sequences, and the efficient market hypothesis.

URL

http://mcnet.marietta.edu/~delemeeg/expernom/s98.html#cooper

Home URL

http://mcnet.marietta.edu/~delemeeg/expernom.html
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