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Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment

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

We conduct a series of experiments that simulate trading in financial markets and which allows us to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. We 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. We 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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File URL: http://idei.fr/doc/by/bisiere/risk_attitude_2012.pdf
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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 552.

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Date of creation: May 2009
Date of revision: May 2012
Handle: RePEc:ide:wpaper:20671
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