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Emotions and Chat in a Financial Markets Experiment

Author Info

  • Shaun P. Hargreaves Heap

    (University of East Anglia)

  • Daniel John Zizzo

    (University of East Anglia)

Abstract

This paper examines experimentally two common conjectures in the popular literature on financial markets: that they are swayed by emotion and that they behave like a 'crowd'. We find consistent evidence that deviations of prices from fundamental value depend on the emotion of excitement and on the presence of independently identified 'irrational' traders. Other than through 'irrational' traders, there is no evidence, however, that non-price communication ('chat') influences prices. Subjects with an economics background make better traders.

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File URL: http://www.uts.edu.au/sites/default/files/wp10.pdf
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Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 10.

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Length: 30 pages
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:uts:pwcwps:10
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Keywords: asset bubbles; cheap talk; emotions; noise traders; behavioral finance.;

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Find related papers by JEL classification:
  • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  1. Jim Engle-Warnick & Sonia Laszlo Author Email: sonia.laszlo@mcgill.ca, 2006. "Learning By Doing In An Ambiguous Environment," Departmental Working Papers 2006-29, McGill University, Department of Economics.
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  7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
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  9. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
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  14. Bruno Frey & Stephan Meier, 2005. "Selfish and Indoctrinated Economists?," European Journal of Law and Economics, Springer, vol. 19(2), pages 165-171, April.
  15. Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1989. "Communication in the Battle of the Sexes Game: Some Experimental Results," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 568-587, Winter.
  16. Daniel Zizzo, 2010. "Experimenter demand effects in economic experiments," Experimental Economics, Springer, vol. 13(1), pages 75-98, March.
  17. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  18. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
  19. Larry Epstein & Martin Schneider, 2004. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 507, University of Rochester - Center for Economic Research (RCER).
  20. Warneryd, Karl-Erik, 1996. "Risk attitudes and risky behavior," Journal of Economic Psychology, Elsevier, vol. 17(6), pages 749-770, December.
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Cited by:

  1. repec:dgr:kubcen:2013020 is not listed on IDEAS
  2. repec:dgr:kubcen:2013031 is not listed on IDEAS
  3. Noussair, C.N. & Tucker, S., 2013. "Experimental Research On Asset Pricing," Discussion Paper 2013-020, Tilburg University, Center for Economic Research.
  4. Daniel John Zizzo, 2012. "Inducing natural group identity: A RDP analysis," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 12-01, School of Economics, University of East Anglia, Norwich, UK..

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