IDEAS home Printed from https://ideas.repec.org/p/gre/wpaper/2017-08.html
   My bibliography  Save this paper

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), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2017-08
    as

    Download full text from publisher

    File URL: http://195.220.198.217/GREDEG-WP-2017-08.pdf
    File Function: First version, 2017
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2017. "It is Not Just Confusion! Strategic Uncertainty in An Experimental Asset Market," Economic Journal, Royal Economic Society, vol. 127(605), pages 563-580, October.
    2. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?," American Economic Review, American Economic Association, vol. 100(3), pages 1238-1260, June.
    3. Brice Corgnet & Roberto Hernán-González & Praveen Kujal & David Porter, 2015. "The Effect of Earned Versus House Money on Price Bubble Formation in Experimental Asset Markets," Review of Finance, European Finance Association, vol. 19(4), pages 1455-1488.
    4. Akiyama, Eizo & Hanaki, Nobuyuki & Ishikawa, Ryuichiro, 2014. "How do experienced traders respond to inflows of inexperienced traders? An experimental analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 1-18.
    5. David Gill & Victoria Prowse, 2016. "Cognitive Ability, Character Skills, and Learning to Play Equilibrium: A Level-k Analysis," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1619-1676.
    6. Cheung, Stephen L. & Hedegaard, Morten & Palan, Stefan, 2014. "To see is to believe: Common expectations in experimental asset markets," European Economic Review, Elsevier, vol. 66(C), pages 84-96.
    7. Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
    8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    9. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
    10. Brice Corgnet & Roberto Hernán González & Praveen Kujal & David Porter, 2013. "The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets," Working Papers 13-04, Chapman University, Economic Science Institute.
    11. Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
    12. 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.
    13. Cueva, Carlos & Rustichini, Aldo, 2015. "Is financial instability male-driven? Gender and cognitive skills in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 330-344.
    14. Powell, Owen & Shestakova, Natalia, 2016. "Experimental asset markets: A survey of recent developments," Journal of Behavioral and Experimental Finance, Elsevier, vol. 12(C), pages 14-22.
    15. Dufwenberg, Martin & Sundaram, Ramya & Butler, David J., 2010. "Epiphany in the Game of 21," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 132-143, August.
    16. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-541, October.
    17. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-2753, October.
    18. Eugenio Proto & Aldo Rustichini & Andis Sofianos, 2019. "Intelligence, Personality, and Gains from Cooperation in Repeated Interactions," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1351-1390.
    19. Catherine C. Eckel & Sascha C. Füllbrunn, 2015. "Thar SHE Blows? Gender, Competition, and Bubbles in Experimental Asset Markets," American Economic Review, American Economic Association, vol. 105(2), pages 906-920, February.
    20. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    21. Stefan Palan, 2013. "A Review Of Bubbles And Crashes In Experimental Asset Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 570-588, July.
    22. Charles P. Kindleberger & Robert Z. Aliber, 2005. "Manias, Panics and Crashes," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-0-230-62804-5.
    23. Carpenter, Jeffrey & Graham, Michael & Wolf, Jesse, 2013. "Cognitive ability and strategic sophistication," Games and Economic Behavior, Elsevier, vol. 80(C), pages 115-130.
    24. Breaban, A.G. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Other publications TiSEM 3103cf69-bc46-42bf-a9a5-e, Tilburg University, School of Economics and Management.
    25. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
    26. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," Working Papers 1398, Princeton University, Department of Economics, Econometric Research Program..
    27. Gneezy, Uri & Rustichini, Aldo & Vostroknutov, Alexander, 2010. "Experience and insight in the Race game," Journal of Economic Behavior & Organization, Elsevier, vol. 75(2), pages 144-155, August.
    28. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 13(3), pages 284-298, September.
    29. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    30. Breaban, Adriana & Noussair, Charles N., 2015. "Trader characteristics and fundamental value trajectories in an asset market experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 8(C), pages 1-17.
    31. Rajesh K. Aggarwal & Guojun Wu, 2006. "Stock Market Manipulations," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1915-1954, July.
    32. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hubert J. Kiss & Laszlo A. Koczy & Agnes Pinter & Balazs R. Sziklai, 2019. "Does risk sorting explain bubbles?," CERS-IE WORKING PAPERS 1905, Institute of Economics, Centre for Economic and Regional Studies.
    2. 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), Université Côte d'Azur, France.
    3. Bao, Te & Hommes, Cars, 2019. "When speculators meet suppliers: Positive versus negative feedback in experimental housing markets," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    4. 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.
    5. Hanaki, Nobuyuki & Akiyama, Eizo & Ishikawa, Ryuichiro, 2018. "Behavioral uncertainty and the dynamics of traders’ confidence in their price forecasts," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 121-136.
    6. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, Institute of Labor Economics (IZA).
    7. David L. Dickinson & Ananish Chaudhuri & Ryan Greenaway-McGrevy, 2020. "Trading while sleepy? Circadian mismatch and mispricing in a global experimental asset market," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 526-553, June.
    8. Marquardt, Philipp & Noussair, Charles N & Weber, Martin, 2019. "Rational expectations in an experimental asset market with shocks to market trends," European Economic Review, Elsevier, vol. 114(C), pages 116-140.
    9. Kiss, Hubert J. & Kóczy, László Á. & Pintér, Ágnes & Sziklai, Balázs R., 2022. "Does risk sorting explain overpricing in experimental asset markets?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 99(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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), Université Côte d'Azur, France.
    2. Kiss, Hubert J. & Kóczy, László Á. & Pintér, Ágnes & Sziklai, Balázs R., 2022. "Does risk sorting explain overpricing in experimental asset markets?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 99(C).
    3. Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
    4. Utz Weitzel & Christoph Huber & Jürgen Huber & Michael Kirchler & Florian Lindner & Julia Rose & Lauren Cohen, 2020. "Bubbles and Financial Professionals [Margin, short sell, and lotteries in experimental asset markets]," The Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2659-2696.
    5. Hubert J. Kiss & Laszlo A. Koczy & Agnes Pinter & Balazs R. Sziklai, 2019. "Does risk sorting explain bubbles?," CERS-IE WORKING PAPERS 1905, Institute of Economics, Centre for Economic and Regional Studies.
    6. Akiyama, Eizo & Hanaki, Nobuyuki & Ishikawa, Ryuichiro, 2014. "How do experienced traders respond to inflows of inexperienced traders? An experimental analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 1-18.
    7. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, Institute of Labor Economics (IZA).
    8. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2017. "It is Not Just Confusion! Strategic Uncertainty in An Experimental Asset Market," Economic Journal, Royal Economic Society, vol. 127(605), pages 563-580, October.
    9. Nobuyuki Hanaki, 2020. "Cognitive ability and observed behavior in laboratory experiments: implications for macroeconomic theory," The Japanese Economic Review, Springer, vol. 71(3), pages 355-378, July.
    10. Marquardt, Philipp & Noussair, Charles N & Weber, Martin, 2019. "Rational expectations in an experimental asset market with shocks to market trends," European Economic Review, Elsevier, vol. 114(C), pages 116-140.
    11. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2017. "Effects of eliciting long-run price forecasts on market dynamics in asset market experiments," Working Papers halshs-01263661, HAL.
    12. 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), Université Côte d'Azur, France.
    13. Corgnet, Brice & Hernán-González, Roberto & Kujal, Praveen, 2020. "On booms that never bust: Ambiguity in experimental asset markets with bubbles," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    14. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2018. "Speculation and Price Indeterminacy in Financial Markets: An Experimental Study," Cowles Foundation Discussion Papers 2134, Cowles Foundation for Research in Economics, Yale University.
    15. Nobuyuki Hanaki & Angela Sutan & Marc Willinger, 2016. "The Strategic Environment Effect in Beauty Contest Games," GREDEG Working Papers 2016-05, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    16. Shestakova, Natalia & Powell, Owen & Gladyrev, Dmitry, 2019. "Bubbles, experience and success," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 206-213.
    17. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.
    18. Duchêne, Sébastien & Guerci, Eric & Hanaki, Nobuyuki & Noussair, Charles N., 2019. "The effect of short selling and borrowing on market prices and traders’ behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    19. Hirota, Shinichi & Huber, Juergen & Stöckl, Thomas & Sunder, Shyam, 2022. "Speculation, money supply and price indeterminacy in financial markets: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1275-1296.
    20. Penalver, Adrian & Hanaki, Nobuyuki & Akiyama, Eizo & Funaki, Yukihiko & Ishikawa, Ryuichiro, 2020. "A quantitative easing experiment," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).

    More about this item

    Keywords

    Cognitive ability; Heterogeneity; Mispricing; Experimental asset markets;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gre:wpaper:2017-08. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Patrice Bougette (email available below). General contact details of provider: https://edirc.repec.org/data/credcfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.