Expectations and learning in Iowa Oleg Bondarenko a , Peter Bossaerts b, * a University of Illinois, Chicago, IL 60612, USA b California Institute of Technology, Division of Humanities and Social Sciences, m/c 228-77, Pasadena, CA 91125, USA Received 27 July 1997; accepted 2 September 1999 Abstract We study the rationality of learning and the biases in expectations in the Iowa Ex- perimental Markets. Using novel tests developed in (Bossaerts, P., 1996. Martingale restrictions on equilibrium security prices under rational expectations and consistent beliefs. Caltech working paper; Bossaerts, P., 1997. The dynamics of equity prices in fallible markets. Caltech working paper), learning in the Iowa winner-take-all markets is found to be in accordance with the rules of conditional probability (Bayes' law). Hence, participants correctly update their beliefs using the available information. There is ev- idence, however, that beliefs do not satisfy the restrictions of rational expectations that they re¯ect the factual distribution of outcomes. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: C90; D84; G14 Keywords: Arrow±Debreu securities; Experimental markets; Rational expectations equilibrium; Bayesian equilibrium; Consistent beliefs; Market eciency; Learning; Martingales Journal of Banking & Finance 24 (2000) 1535±1555 www.elsevier.com/locate/econbase * Corresponding author. Tel.: +1-626-395-4028; fax: +1-626-405-9841. E-mail address: pbs@rioja.caltech.edu (P. Bossaerts). 0378-4266/00/$ - see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 9 0 - 4