Fundamental value trajectories and trader characteristics in an asset market experiment
AbstractWe report results from an asset market experiment, in which we investigate how the time path of the fundamental value trajectory affects the level of adherence to fundamentals. In contrast to previous experiments with long-lived assets, there is a phase in which fundamental values are constant before the onset of a trend. The trend is either increasing or decreasing, depending on the treatment. We compare the level of mispricing between the decreasing and increasing fundamental value trajectories. Before the market begins, risk aversion, loss aversion, and cognitive reflection protocols are administered to traders. We find evidence for closer adherence to fundamental values when the trajectory follows a decreasing, than when it has an increasing, trend. Greater average risk aversion on the part of traders in the market predicts lower market prices. The greater the level of loss aversion of the trader cohort, the lower the quantity traded. The greater the average cognitive reflection test score, the smaller the differences between market prices and fundamental values. The variation between groups in risk aversion, loss aversion, and CRT score, explains 45% and 18% of the cohort-level variation in price level and mispricing, respectively.
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Bibliographic InfoPaper provided by Economics Department, Universitat Jaume I, Castellón (Spain) in its series Working Papers with number 2014/08.
Length: 36 pages
Date of creation: 2014
Date of revision:
Bubble; Fundamental Value; CRT; Crash;
Other versions of this item:
- Breaban, A. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Discussion Paper 2014-010, Tilburg University, Center for Economic Research.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
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