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Exploring the Nature of "Trader Intuition"

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  • ANTOINE J. BRUGUIER
  • STEVEN R. QUARTZ
  • PETER BOSSAERTS
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    Abstract

    Experimental evidence has consistently confirmed the ability of uninformed traders, even novices, to infer information from the trading process. After contrasting brain activation in subjects watching markets with and without insiders, we hypothesize that Theory of Mind (ToM) helps explain this pattern, where ToM refers to the human capacity to discern malicious or benevolent intent. We find that skill in predicting price changes in markets with insiders correlates with scores on two ToM tests. We document GARCH-like persistence in transaction price changes that may help investors read markets when there are insiders. Copyright (c) 2010 the American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 5 (October)
    Pages: 1703-1723

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1703-1723

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    Cited by:
    1. Élise PAYZAN LE NESTOUR, 2010. "Bayesian Learning in UnstableSettings: Experimental Evidence Based on the Bandit Problem," Swiss Finance Institute Research Paper Series 10-28, Swiss Finance Institute.
    2. repec:fee:wpaper:1102 is not listed on IDEAS
    3. Pablo Brañas-Garza & Teresa García-Muño & Roberto Hernán, 2011. "Cognitive effort in the Beauty Contest Game," Working Papers 11-08, Chapman University, Economic Science Institute.
    4. Thomas Stoeckl, 2013. "Price efficiency and trading behavior in limit order markets with competing insiders," Working Papers 2013-11, Faculty of Economics and Statistics, University of Innsbruck.
    5. Cary Frydman & Nicholas Barberis & Colin Camerer & Peter Bossaerts & Antonio Rangel, 2012. "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility," NBER Working Papers 18562, National Bureau of Economic Research, Inc.
    6. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
    7. Shachat, Jason & Srivinasan, Anand, 2011. "Informational price cascades and non-aggregation of asymmetric information in experimental asset markets," MPRA Paper 30308, University Library of Munich, Germany.
    8. Thomas Stöckl, 2014. "Price efficiency and trading behavior in limit order markets with competing insiders," Experimental Economics, Springer, vol. 17(2), pages 314-334, June.

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