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Selection-Neglect in the NFT Bubble

Author

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  • Dong Huang
  • William N. Goetzmann

Abstract

Using transaction data from a large non-fungible token (NFT) trading platform, this paper examines how the behavioral bias of selection-neglect interacts with extrapolative beliefs, accelerating the boom and delaying the crash in the recent NFT bubble. We show that the price-volume relationship is consistent with extrapolative beliefs about increasing prices which were plausibly triggered by a macroeconomic shock. We test the hypothesis that agents prone to selection-neglect formed even more optimistic beliefs and traded more aggressively than their counterparts during the boom. When liquidity for NFTs declined, observed NFT prices were subject to severe selection bias due in part to seller loss aversion delaying the onset of the crash. Finally, we show that market participants with sophisticated bidding behavior were less subject to selection bias and performed better.

Suggested Citation

  • Dong Huang & William N. Goetzmann, 2023. "Selection-Neglect in the NFT Bubble," NBER Working Papers 31498, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31498
    Note: AP
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G4 - Financial Economics - - Behavioral Finance
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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