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Risk attitude, beliefs updating and the information content of trades: an experiment

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  • Lovo, Stefno
  • Bisière, Christophe
  • Décamps, Jean-Paul

Abstract

In this paper, the authors conduct a series of experiments that simulate trading in financial markets and which allows them to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. They find that there are very few risk-neutral subjects and that subjects displaying risk aversion or risk-loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. Consequently, private information struggles penetrating trading prices. The authors find evidence of non-Bayesian belief updating (confirmation bias and under-confidence). This reduces (improves) market efficiency when subjects’ prior beliefs are weak (strong).

Suggested Citation

  • Lovo, Stefno & Bisière, Christophe & Décamps, Jean-Paul, 2009. "Risk attitude, beliefs updating and the information content of trades: an experiment," HEC Research Papers Series 917, HEC Paris.
  • Handle: RePEc:ebg:heccah:0917
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    2. Charness, Gary & Dave, Chetan, 2017. "Confirmation bias with motivated beliefs," Games and Economic Behavior, Elsevier, vol. 104(C), pages 1-23.

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    More about this item

    Keywords

    risk attitude; financial market; information; belief; risk-neutral information;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F18 - International Economics - - Trade - - - Trade and Environment

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