Abstract: Foreign exchange traders engage in excessive speculation, stemming from heuristic-driven bias. In particular, foreign exchange traders seem to overreact, bet on trends, and are overconfident. Therefore, the foreign exchange market shares similar features with the pick-a-number game described in Chapter 1. Foreign exchange rates are affected by both fundamental economic factors and by sentiment. This is yet one more instance where heuristic-driven bias leads to market inefficiency.

Keywords: extreme forecasts, forward discount, market efficiency, overconfidence, psychology,