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Diversity in Cognitive Ability Enlarges Mispricing

Author

Listed:
  • Nobuyuki Hanaki

    (Université Nice Sophia Antipolis
    GREDEG-CNRS
    IUF)

  • Eizo Akiyama

    (University of Tsukuba, Japan)

  • Yukihiko Funaki

    (Waseda University, Japan)

  • Ryuichiro Ishikawa

    (University of Tsukuba, Japan)

Abstract

How does known diversity in cognitive ability among market participants in ufence market outcomes? We investigated this question by first measuring subjects' cognitive ability and categorizing them as 'H' type for those above median ability and 'L' type for those below median ability. We then constructed three kinds of markets with six traders each: 6H, 6L, and 3H3L. Subjects were informed of their own cognitive type and that of the others in their market. We found heterogeneous markets (3H3L) generated signi cantly larger mispricing than homogeneous markets (6H or 6L). Thus, known diversity in cognitive ability among market participants impacts mispricing.

Suggested Citation

  • Nobuyuki Hanaki & Eizo Akiyama & Yukihiko Funaki & Ryuichiro Ishikawa, 2015. "Diversity in Cognitive Ability Enlarges Mispricing," GREDEG Working Papers 2015-29, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2015-29
    as

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    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2015-29.pdf
    File Function: First version, 2015
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    References listed on IDEAS

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    Cited by:

    1. Andreas Hefti & Steve Heinke & Frédéric Schneider, 2016. "Mental capabilities, trading styles, and asset market bubbles: theory and experiment," ECON - Working Papers 234, Department of Economics - University of Zurich.

    More about this item

    Keywords

    Cognitive ability; Heterogeneity; Mispricing; Experimental asset markets;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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