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Are investors really willing to agree to disagree? An experimental investigation of how disagreement and attention to disagreement affect trading behavior

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  • Hales, Jeffrey
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    Abstract

    Using a series of laboratory markets, this paper provides evidence that a willingness to engage in speculative trade is largely driven by a failure of traders to account for information about value implicit in other traders' actions and that this behavior arises because traders construct myopic mental models that ignore the perspective of other traders. In a baseline set of markets, where traders are prompted to estimate fundamental value but are not overtly prompted to consider disagreement, I find that traders are generally insensitive to adverse selection and readily engage in suboptimal, speculative trade. Moreover, this effect does not decline across trials suggesting that market feedback alone is unlikely to correct traders' behavior. In contrast, when traders are prompted to assess disagreement over asset values or when they trade in more transparent markets, they appear less willing to "agree to disagree." These results provide insight into why investors depart from rational trading strategies and how investor psychology will influence trading behavior.

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    Bibliographic Info

    Article provided by Elsevier in its journal Organizational Behavior and Human Decision Processes.

    Volume (Year): 108 (2009)
    Issue (Month): 2 (March)
    Pages: 230-241

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    Handle: RePEc:eee:jobhdp:v:108:y:2009:i:2:p:230-241

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    Web page: http://www.elsevier.com/locate/obhdp

    Related research

    Keywords: Experimental economics Disagreement Trading volume Adverse selection Myopia Mental models Transparency;

    References

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Somewhere else, part 3
      by arthur charpentier in Freakonometrics on 2012-07-30 20:41:00
    2. Dr. Smith and the Asset Bubble
      by in Confessions of a Supply-Side Liberal on 2012-07-19 11:06:00
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    Cited by:
    1. Abreu, Margarida & Mendes, Victor, 2012. "Information, overconfidence and trading: Do the sources of information matter?," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 868-881.
    2. Chou, Pin-Huang & Huang, Tsung-Yu & Yang, Hung-Jeh, 2013. "Arbitrage risk and the turnover anomaly," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4172-4182.

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