In-class exercise

Note

Please respect the time limits. Of course you do not need to set a timer, but it is important that you make it to the very end.

The tasks relate to “Overinference from Weak Signals and Underinference from Strong Signals” (Augenblick et al., 2023)

Task 1: (45min)

Consider Section 2 of the paper.

1. Explain what it means in terms of the model to overreaction to signals?

2. Try to provide a clear intuition for how the model generates both over- and underreaction to signals

Task 2-1: Lab Experiment (60min)

1. Describe the experimental design in Augenblick et al. What is the key idea underlying the design?

2. Are the authors able to establish a causal relation between signal strength and over- and under-reaction?

3. Please summarize the key results from the lab experiment.

Task 2-2: Financial Markets (60min)

1. Describe the empirical approach in Augenblick et al to study over- and under-reaction in financial and sports betting markets. What is the key idea underlying this approach?

2. Please summarize the key corresponding results.