A Study of Uncertainty & Expectations in Asset Markets

Abstract

This paper comprehensively examines the impact of expectations and uncertainty on asset market dynamics, with a particular focus on the role of conformity, momentum effects, and strategic uncertainty in shaping market participants' behavior and influencing asset prices and trading volumes. Drawing upon the existing literature, the paper critically reviews the role of these factors in contributing to market inefficiencies, volatility, and potential instability. Acknowledging the limitations of laboratory settings and the challenges in controlling for cognitive factors, such as players' perceptions of their opponents' rationality, the study aims to provide a deeper understanding of the dynamics of mispricing in asset market experiments. Furthermore, the paper discusses the importance of considering psychological factors, such as reversal and momentum effects, when analyzing financial market dynamics and investor decision-making. By proposing a new experiment that addresses the questions raised in the literature, this paper seeks to advance our knowledge of the critical factors influencing investor decision-making in the face of uncertainty, the factors that contribute to mispricing in asset markets, and the importance of public knowledge in shaping market outcomes. The insights gleaned from this research contribute significantly to our understanding of uncertainty and expectations in asset markets and have important implications for market participants, policymakers, and researchers seeking to foster greater stability and efficiency in financial markets.