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Psychological Traits and Trading Strategies

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  • Biais, Bruno
  • Hilton, Denis
  • Pouget, Sébastien

Abstract

In this Paper we measure psychological traits and show that they significantly affect behaviour and performance in a financial context. Based on the answers of 184 subjects to a psychological questionnaire we measured their degree of overconfidence, ie. the extent to which they overestimate the precision of their information, and self-monitoring, which is a form of social intelligence. The subjects also participated in an experimental financial market under asymmetric information in the spirit of Plott and Sunder (1988). In line with the hypothesis that they suffer from the winner’s curse, overconfident subjects are found to earn relatively low trading profits. In contrast, our finding that high self-monitors earn relatively large trading profits is consistent with the hypothesis that they are relatively good at anticipating the trading motivations of the other traders.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3195.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3195

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Keywords: self-monitors; social intelligence; trading strategies;

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  1. Selten,Reinhard & Mitzkewitz,Michael & Uhlich,Gerald, . "Duopoly strategies programmed by experienced players," Discussion Paper Serie B 106, University of Bonn, Germany.
  2. Klayman, Joshua & Soll, Jack B. & Gonzalez-Vallejo, Claudia & Barlas, Sema, 1999. "Overconfidence: It Depends on How, What, and Whom You Ask, , , , , , , , ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 79(3), pages 216-247, September.
  3. Anderson, Matthew J. & Sunder, Shyam, 1995. "Professional Traders as Intuitive Bayesians," Organizational Behavior and Human Decision Processes, Elsevier, vol. 64(2), pages 185-202, November.
  4. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-54, October.
  5. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February.
  6. Camerer, Colin, . "Progress and Behavioral Game Theory," Working Papers 1004, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  8. Biais, Bruno & Pouget, Sébastien, 2000. "Microstructure, Incentives, and the Discovery of Equilibrium in Experimental Financial Markets," IDEI Working Papers 103, Institut d'Économie Industrielle (IDEI), Toulouse.
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Citations

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Cited by:
  1. Glaser, Markus & Weber, Martin, 2003. "Overconfidence and Trading Volume," CEPR Discussion Papers 3941, C.E.P.R. Discussion Papers.
  2. Dennis Dittrich & Werner Guth & Boris Maciejovsky, 2005. "Overconfidence in investment decisions: An experimental approach," The European Journal of Finance, Taylor & Francis Journals, vol. 11(6), pages 471-491.
  3. Shahzad, Syed jawad hussain & Ali, Paeman & Saleem, Fawad & Ali, Sajid & Akram, Sehrish, 2013. "Stock market efficiency: Behavioral or traditional paradigm?Evidence from Karachi Stock Exchange (KSE) and investors community of Pakistan," MPRA Paper 45095, University Library of Munich, Germany.
  4. Glaser, Markus & Weber, Martin, 2003. "Overconfidence and Trading Volume," Sonderforschungsbereich 504 Publications 03-07, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  5. Patterson, Fernando M. & Daigler, Robert T., 2014. "The abnormal psychology of investment performance," Review of Financial Economics, Elsevier, vol. 23(2), pages 55-63.
  6. Miraldo, M & Galizzi, M & Stavropoulou, C, 2013. "In sickness but not in wealth: Field evidence on patients? risk preferences in the financial and health domain," Working Papers 12579, Imperial College, London, Imperial College Business School.
  7. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.

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