IDEAS home Printed from https://ideas.repec.org/p/uts/pwcwps/10.html
   My bibliography  Save this paper

Emotions and Chat in a Financial Markets Experiment

Author

Listed:
  • 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.

Suggested Citation

  • Shaun P. Hargreaves Heap & Daniel John Zizzo, 2011. "Emotions and Chat in a Financial Markets Experiment," Working Paper Series 10, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
    • Handle: RePEc:uts:pwcwps:10
    as

    Download full text from publisher

    File URL: http://www.uts.edu.au/sites/default/files/wp10.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bruno Frey & Stephan Meier, 2005. "Selfish and Indoctrinated Economists?," European Journal of Law and Economics, Springer, vol. 19(2), pages 165-171, April.
    2. repec:hrv:faseco:33077905 is not listed on IDEAS
    3. Larry G. Epstein & Martin Schneider, 2008. "Ambiguity, Information Quality, and Asset Pricing," Journal of Finance, American Finance Association, vol. 63(1), pages 197-228, February.
    4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
    5. Jim Engle-Warnick & Sonia Laszlo, 2017. "Learning-by-doing in an ambiguous environment," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 71-94, August.
    6. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    7. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    9. Warneryd, Karl-Erik, 1996. "Risk attitudes and risky behavior," Journal of Economic Psychology, Elsevier, vol. 17(6), pages 749-770, December.
    10. 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.
    11. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
    12. 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.
    13. 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.
    14. Guth, Werner & Krahnen, Jan P. & Rieck, Christian, 1997. "Financial markets with asymmetric information: A pilot study focusing on insider advantages," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 235-257, April.
    15. Francesca Cornelli & David Goldreich & Alexander Ljungqvist, 2006. "Investor Sentiment and Pre-IPO Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1187-1216, June.
    16. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
    17. Daniel Zizzo, 2010. "Experimenter demand effects in economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 13(1), pages 75-98, March.
    18. 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.
    19. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
    20. Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, August.
    21. Jeffrey R. Brown & Zoran Ivkovic & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    22. Ronald Bosman & Frans van Winden, 2002. "Emotional Hazard in a Power-to-take Experiment," Economic Journal, Royal Economic Society, vol. 112(476), pages 147-169, January.
    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. 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..
    2. Martin G. Kocher & Konstantin E. Lucks & David Schindler, 2016. "Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets," CESifo Working Paper Series 5812, CESifo Group Munich.
    3. Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.
    4. Charles N. Noussair & Steven Tucker, 2013. "Experimental Research On Asset Pricing," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 554-569, July.
    5. Peiran Jiao & Amos Nadler, 2016. "The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading," Economics Series Working Papers 806, University of Oxford, Department of Economics.

    More about this item

    Keywords

    asset bubbles; cheap talk; emotions; noise traders; behavioral finance.;

    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

    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:uts:pwcwps:10. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford). General contact details of provider: http://edirc.repec.org/data/pwutsau.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.