Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets

Abstract

One possible determinant of overpricing on asset markets is a lack of self-control abilities of traders. Self-control is the individual capacity to override or inhibit undesired behavioral tendencies such as impulses and to refrain from acting on them. We implement the first experiment that is able to address a potential causal relationship between self-control abilities and systematic overpricing on financial markets by introducing an exogenous variation of selfcontrol abilities. Our experimental conditions seek to detect some of the channels through which individual self-control problems could transmit into irrational exuberance on the aggregate level. We observe a strong effect of inhibited self-control abilities on market overpricing. Our findings are furthermore robust to reducing self-control abilities only for a moderate share of traders in a market. Low self-control traders engage in more speculative behavior early on, but because others imitate their trading patterns, they do not end up earning less and are not driven out of the market.JEL codes: G02, G11, G12, D53, D84

Checking out temptation: A natural experiment with purchases at the grocery register

“…See also studies examining the effect of willpower depletion on risk attitude(Friehe & Schildberg-Hörisch, 2017;Gerhardt, Schildberg-Hörisch, & Willrodt, 2017), framing effects(De Haan & Van Veldhuizen, 2015), intertemporal financial choice(Kuhn, Kuhn, & Villeval, 2017) and asset pricing(Kocher, Lucks, & Schindler, 2018).…”

No need for more time: Intertemporal allocation decisions under time pressure

“…These findings are supported by recent papers. Kocher et al (2016) conduct an experimental asset market to analyze the relationship between self-control abilities and systematic overpricing on financial markets. By exogenously introducing variations in self-control abilities to deplete cognitive resources, they find 3 a strong e↵ect of self control on market mispricing.…”