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Trading Fast and Slow: The Role Of Deliberation In Experimental Financial Markets

Listed author(s):
  • Giovanni Ferri

    ()

    (LUMSA University)

  • Matteo Ploner

    (University of Trento)

  • Matteo Rizzolli

    ()

    (LUMSA University)

Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long tested both the determinant of financial bubbles’ formation and institutional designs meant at solving such bubbles. In line with this literature we explore whether the dual process theory proposed by Kahneman (2011) can explain bubbles’ formation. As compared with our benchmark FAST treatment, we deliberately slow down the decision making process in our SLOW treatment and thus we induce more System-2 type reasoning. We show that high volatility and extreme realizations are greatly reduced and average prices remain consistently aligned with the expected fundamental value once risk-aversion is considered. We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment. We also show that the SLOW condition clears out the hot-hand fallacy. We finally derive some tentative policy implications concerning slowing down finance.

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File URL: http://repec.lumsa.it/wp/wpC07.pdf
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Paper provided by CERBE Center for Relationship Banking and Economics in its series CERBE Working Papers with number wpC07.

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Length: 22 pages
Date of creation: Mar 2016
Handle: RePEc:lsa:wpaper:wpc07
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