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Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets

Author

Listed:
  • Nobuyuki Hanaki

    (Université Côte d'Azur
    GREDEG-CNRS
    IUF)

  • Eizo Akiyama

    (University of Tsukuba, Japan)

  • Yukihiko Funaki

    (Waseda University, Japan)

  • Ryuichiro Ishikawa

    (University of Tsukuba, Japan)

Abstract

Does diversity of cognitive ability among market participants increase mispricing? Does common knowledge of heterogeneity in relation to cognitive ability of market participants further increase mispricing? We investigated these questions by measuring subjects' cognitive ability and categorizing those above median ability as type `H' and those below median ability as type `L'. We then constructed three market types, each containing six traders: 6H, 6L, and 3H3L. Subjects were informed of their own cognitive type and, depending on the treatment, that of the others in their market. We found that heterogeneous markets (3H3L) generated significantly larger mispricing than homogeneous markets (6H or 6L) regardless of whether subjects were informed about the cognitive type of others in their market. Thus, diversity of cognitive ability among market participants increased mispricing. However, common knowledge of heterogeneity or homogeneity in the market did not have a signi cant additional effect.

Suggested Citation

  • Nobuyuki Hanaki & Eizo Akiyama & Yukihiko Funaki & Ryuichiro Ishikawa, 2017. "Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets," GREDEG Working Papers 2017-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  • Handle: RePEc:gre:wpaper:2017-08
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    File URL: http://www.gredeg.cnrs.fr/working-papers/GREDEG-WP-2017-08.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Tomoe Hoshihata & Ryuichiro Ishikawa & Nobuyuki Hanaki & Eizo Akiyama, 2017. "Flat Bubbles in Long-Horizon Experiments: Results from two Market Conditions," GREDEG Working Papers 2017-32, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    2. 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.
    3. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2018. "Behavioral uncertainty and the dynamics of traders' confidence in their price forecasts ," Post-Print hal-01712301, HAL.
    4. repec:eee:dyncon:v:88:y:2018:i:c:p:121-136 is not listed on IDEAS

    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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