We develop a financial market model with heterogeneous agents who can be affected by confirmation bias. In particular we consider optimistic and pessimistic agents who adjust their beliefs giving more attention and consideration to evidences supporting their prior beliefs. These kinds of traders coexist with fundamentalists and chartists. We show that this psychological bias makes beliefs more and more distant as time passes, and permits to better explain some important stylized facts of financial markets.
Cafferata, A., Tramontana, F., A financial market model with confirmation bias, <<STRUCTURAL CHANGE AND ECONOMIC DYNAMICS>>, 2019; (51): 252-259. [doi:10.1016/j.strueco.2019.08.004] [http://hdl.handle.net/10807/142622]
A financial market model with confirmation bias
Tramontana, Fabio
2019
Abstract
We develop a financial market model with heterogeneous agents who can be affected by confirmation bias. In particular we consider optimistic and pessimistic agents who adjust their beliefs giving more attention and consideration to evidences supporting their prior beliefs. These kinds of traders coexist with fundamentalists and chartists. We show that this psychological bias makes beliefs more and more distant as time passes, and permits to better explain some important stylized facts of financial markets.
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