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

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  • Martin G. Kocher
  • Konstantin E. Lucks
  • David Schindler

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 self-control 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.

Suggested Citation

  • Martin G. Kocher & Konstantin E. Lucks & David Schindler, 2016. "Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets," CESifo Working Paper Series 5812, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5812
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    1. repec:eee:joepsy:v:60:y:2017:i:c:p:53-70 is not listed on IDEAS
    2. Kocher, Martin G. & Martinsson, Peter & Schindler, David, 2017. "Overpricing and stake size: On the robustness of results from experimental asset markets," Economics Letters, Elsevier, vol. 154(C), pages 101-104.
    3. Giovanni Ferri & Matteo Ploner & Matteo Rizzolli, 2016. "Trading Fast and Slow: The Role Of Deliberation In Experimental Financial Markets," CERBE Working Papers wpC07, CERBE Center for Relationship Banking and Economics.
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    5. Lucks, Konstantin, 2016. "The Impact of Self-Control on Investment Decisions," MPRA Paper 73099, University Library of Munich, Germany.
    6. Li, Jianbiao & Niu, Xiaofei & Li, Dahui & Cao, Qian, 2018. "Using Non-Invasive Brain Stimulation to Test the Role of Self-Control in Investor Behavior," EconStor Preprints 177890, ZBW - German National Library of Economics.
    7. Lindner, Florian & Rose, Julia, 2017. "No need for more time: Intertemporal allocation decisions under time pressure," Journal of Economic Psychology, Elsevier, vol. 60(C), pages 53-70.

    More about this item

    Keywords

    behavioural finance; trader behaviour; self control; experimental asset markets; overpricing;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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