Introduction
Policymakers, market analysts, and researchers must understand how individuals form expectations about critical economic variables. In one of the most pioneering studies, the authors used an extraordinary information experiment incorporated in a survey to examine how families change their expectations regarding home price growth. The essay focuses on the experimental survey design, initial informational landscape, respondent reactions to new information, and consequent changes in investment behavior.
Study Design
The study examines how people form expectations of future home prices and their investment choices. In the first stage of the survey, respondents are asked what they think about the changes in property prices in zip codes and how they expect them to occur (Armona et al., 2019). Then, the authors gave the participants information regarding past home price increases in their neighborhoods. The data was then collected after two months as it was re-elicited by the researchers.
Information Availability and Market Hypothesis
According to this research, before being subjected to this information treatment, most of the general population did not know about house price growth rates at the local level. This is supported by evidence from this study, which shows that people project from their perception of one year ago but do not entirely follow accurate movements prices (Armona et al., 2019). Lack of consistency implies incomplete information sharing among individuals within communities. Being incomplete signifies a violation of strong EMH that argues that asset prices reflect all types of public and private data available.
Information Treatment
Treatment participants updated their forecasted house values in response to new housing price information. Typically, they exhibit a pattern of extrapolation but with deviations from observed momentum, indicating nuanced responses to this information. The results presented above show that higher allocation decisions made by different interviewees correspond positively with increased forecasts on what will happen next year with home values (Armona et al., 2019). This implies a significant relationship between investment decision adjustment and expected future increases in house prices.
Strategy for Profit
I suggest investing more in a savings account and less in house market funds. Investors will likely move their money away from housing market funds into savings accounts, considered safe havens against housing market depreciation expectations (Armona et al., 2019). Selling pressure on housing market funds may provide buying opportunities when sentiment is weak because of the possible recovery of the market. This approach resembles the fundamental underpinnings of supply and demand, indicating how to take advantage of markets when they lose hope.
The Revision in House Price Expectation
As shown by equation (5.1) and Table 6, several factors influence the revision in house price expectations. Average treatment effects for short-term (T1) and long-term (T5) horizons are represented by coefficients (β1, β2) showing how the treatment influenced expectations (Armona et al., 2019). Differences between past perceptions and actual home price changes could be viewed as perception gaps (β3, β4), which lead to revision. The interaction terms (β5, β6) show how the treatment effects change (Armona et al., 2019). Expectation revisions are also influenced by confidence, prior uncertainty, and presentation format (C-frame).
Experimental Survey
I can design an experiment by randomly dividing the participants into two groups. One has information on the S&P 500 returns for the past year, and the other has information on the last five years’ returns. I will measure individuals’ initial expectations for future stock returns over a 5-year and assess how their expectations have changed after giving them the information (Armona et al., 2019). Moreover, Li may also ask about their investment strategy, which divides an imaginary amount between a savings account and a fund linked to the stock index.
Conclusion
This paper sheds light on the complex relationship between information, expectations, and behavior in the housing market. The experiment survey design captures the dynamics of expectation formation very well, thereby revealing rational and irrational elements in people’s reactions to past home price information. It is crucial to note that if information effects are persistent, then this implies that they have long-term effects on expectations.
Reference
Armona, L., Fuster, A., & Zafar, B. (2019). Home price expectations and behaviour: Evidence from a randomized information experiment. The Review of Economic Studies, 86(4), 1371-1410. Web.