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

  • Lovo, Stefno

    ()

  • Bisière, Christophe

    ()

  • Décamps, Jean-Paul

    ()

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).

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 917.

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Length: 33 pages
Date of creation: 19 May 2009
Date of revision:
Handle: RePEc:ebg:heccah:0917
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