An exploratory study of heuristics for anticipating prices

Abstract

Purpose: this research explores how investment and central bankers cope with strategic uncertainty when they anticipate prices. The uncertainty originates from others’ decisions and their consequences, and cannot be meaningfully reduced to risk. We postulate that, in order to cope with this type of uncertainty, bankers use simple rules, also called heuristics. This study aims to identify such heuristics and the psychological processes that underlie them.

Design/methodology/approach: we interviewed 22 managers of teams tasked to
anticipate prices, in two leading investment and central banks. The primary data came from indepth, semi-structured interviews lasting 30 to 60 minutes, supplemented by our observations during the on-site visits, emails and phone calls when preparing the interviews, and reports published by the banks. Data was coded and heuristics were induced over multiple rounds by multiple researchers.

Findings: bankers (1) construct simple game representations of markets, (2) make
inferences to gauge opponents, (3) become alert when they see too much agreement, and (4) communicate coherent narratives. Heuristics (1)–(3) are employed when the pace of decision making is fast, whereas (4) is used for longer time scales. In sum, bankers exhibit reciprocal bounded rationality, wherein interaction partners are mutually aware of and adapted to the fundamental uncertainty of the task and their limited resources.

Originality: heuristics for anticipating prices have not been studied empirically outside the lab. The findings may help integrate conceptualizations of heuristics in the simple-rules and fast-and-frugal-heuristics research programs, and improve market efficiency.

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Identifiers

ORCID for Konstantinos Katsikopoulos: orcid.org/0000-0002-9572-1980

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