Essays on Expectations.

In Chapter 1 I investigate the factors driving demand in laboratory asset bubbles. Price-taking subjects trade a risky asset at prices that feature a bubble. I record subjects’ predictions of future prices and fundamentals. Subjects who demonstrate good understanding of fundamentals behave similarly to other traders. Subjects show a strong tendency to buy immediately after the bubble peak, even though the price still exceeds the maximum possible payout. Asset demand is influenced by predictions of short-term price movements, showing that speculation exists in this type of market. Additionally, lagged asset prices are a strong predictor of demand, suggesting that subjects use the price as a signal of asset value. These results shed light on why bubbles may persist despite the presence of rational traders. In Chapter 2 I study the use of private signals of fundamental value in a common type of experimental asset market. I also assess the impact of two kinds of psychological overconfidence. Traders use their private signals to make trading decisions and to determine reservation prices, even after most trades in a period have been concluded. However, there is only mixed evidence that overconfidence increases reliance on private signals. There is no observed relationship between overconfidence and trading frequency, market price or volatility; however, there is a small-sample correlation between volume and average overconfidence. These results are consistent with models of financial markets in which traders overweight private signals; however, they offer only tepid support for psychological overconfidence as the cause of this overweighting. In Chapter 3 I examine the relationship between emotional affect and expectations about economic variables, using new panel survey data from the Michigan Survey of Consumers. I find little correlation between national average happiness and expectations. Happiness and expectations are correlated at the individual level; however, this correlation is mostly due to individual fixed effects. These results cast doubt on the notion that business cycles and asset price movements are driven by national mood swings (animal spirits). However, the finding that happier people are more optimistic is troubling for strict versions of the Rational Expectations Hypothesis.PHDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/96035/1/nquixote_1.pd