Trader characteristics and fundamental value trajectories in an asset market experiment

Breaban, Adriana; Noussair, Charles

doi:10.1016/j.jbef.2015.07.005

Cited by 62 publications

(53 citation statements)

References 24 publications

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“…As observed in other studies (Breaban and Noussair ; Charness and Neugebauer ; Corgnet et al ), CRT score correlates with the use of profitable strategies in the asset market. Endowing traders with more cash allows relatively unsophisticated traders to more readily take large long positions, and permits a relatively small number of traders to drive up prices.…”

Section: Discussionsupporting

confidence: 82%

Cash Inflows and Bubbles in Asset Markets With Constant Fundamental Values

Noussair

Tucker

2016

Economic Inquiry

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Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. (JEL C90, D03, G02, G12)

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Section: Discussionsupporting

confidence: 82%

Cash Inflows and Bubbles in Asset Markets With Constant Fundamental Values

Noussair

Tucker

2016

Economic Inquiry

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“…On the other hand, Bruguier, Quartz, and Bossaerts (2010) do not find that cognitive ability is related to the ability to correctly predict asset prices, and Janssen, Weitzel, and Füllbrunn (2015) find no correlation between CRT and behavior in their speculation task. Concerning aggregate outcomes, markets with traders exhibiting higher average analytical abilities produce lower price volatility (Breaban and Noussair 2015;Cueva and Rustichini 2015). 4 These observations are in line with studies on actual stock market behavior.…”

Section: Related Literaturesupporting

confidence: 69%

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe propose that heterogeneous asset trading behavior is the result of two distinct, non-convertible mental dimensions: analytical ("quantitative") capability and mentalizing ("perspective-taking") capability. We develop a framework of mental capabilities that yields testable predictions about individual trading behavior, revenue distribution and aggregate outcomes. The two-dimensional structure of mental capabilities predicts the existence of four mental types with distinguishable trading patterns and revenues. Individuals will trade most successfully if and only if they have both capabilities. On the other hand, subjects who can mentalize well but have poor analytical capability will suffer the largest losses. As a consequence, being able in just one dimension does not assure trading success. We test these implications in a laboratory environment, where we first independently elicit subjects' capabilities in both dimensions and then conduct a standard asset market experiment. We find that individual trading gains and patterns are consistent with our theoretical predictions. Our results suggest that two mental dimensions are necessary to encompass the complex heterogeneous behaviors in asset markets; a one-dimensional measure of mental capability will lead to biased conclusions. The findings have potential implications for financial institutions, which can use the measures to select successful traders, or for policy-makers, helping them to prevent the formation of asset bubbles. Finally, our conceptual framework and the empirical screening method could be applied to explain heterogeneous behavior in other games.

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“…Recent results in single‐asset market experiments point to systematic effects of CRT scores (Corgnet et al. (), Akiyama, Hanaki, and Ishikawa (), Breaban and Noussair (), Noussair, Tucker, and Yu ()). Below, we also measure the effect of gender and risk aversion (as elicited in the investment game) on our mispricing measures to .…”

Section: Measures and Hypothesesmentioning

confidence: 99%

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Charness¹,

Neugebauer²

2018

The Journal of Finance

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Modigliani and Miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage‐free. We investigate this invariance theorem in experimental asset markets, finding value‐invariance for assets of identical risks when returns are perfectly correlated. However, exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated, in which case the law of one price is violated. Discrepancies shrink in consecutive markets, but persist even with experienced traders. In markets where overall trader acuity is high, assets trade closer to parity.

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Trader characteristics and fundamental value trajectories in an asset market experiment

Cited by 62 publications

References 24 publications

Cash Inflows and Bubbles in Asset Markets With Constant Fundamental Values

Cash Inflows and Bubbles in Asset Markets With Constant Fundamental Values

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

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