Do corporate executives have rational expectations?

Article Abstract:

A study is made on the rationality of the expectations of corporate executives using the Profit Impact of Market Strategy (PIMS) survey. The PIMS data set is appropriate for the study because they are direct quantifications of expectations, thus, eliminating the need for auxiliary hypotheses. The data set also ensures accuracy because the survey respondents have a financial stake for the analysis of their data. The data is not a random representative of companies because the companies have voluntarily participated in the PIMS project. The results indicate that executives do not have rational expectations regarding variables such as output prices, purchased material prices, wages and market size. Heteroscedasticity also does not influence the rejections. The results also underscore the difficulty in predicting expectations.

Practice, Executives

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The survival of noise traders in financial markets

Article Abstract:

Securities traders with incorrect expectations about variances in returns can earn higher returns than rational investors, even in the long run. A one-period, portfolio allocation model in which prices are not affected by noise traders shows that investors with incorrect perceptions about asset returns can be successful in a competitive stock or currency market. Noise traders can dominate the market, in spite of excessive risk-taking and higher consumption. The model provides an argument for the long-run viability of noise traders.

Models, Portfolio management, Financial markets

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