Michailova, Julija (2010): Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets.
Download (515Kb) | Preview
In this paper influence of behavioral factors (overconfidence and risk aversion) on financial decision making of economic subjects is analyzed. For this purpose two kinds of experiments were conducted: asset market and risk aversion experiments. In conducted asset market sessions subjects, based on their pre-experimental overconfidence scores, were assigned to two types of markets: the least overconfident ones formed five “rational” markets and the most overconfident ones formed five “overconfident” markets. Data collected from ten experimental sessions revealed that individual performance and trade activity were overconfidence dependent. Even small variations in miscalibration among players of the same “type”, comprising each of the asset markets, were sufficient to cause this effect. In the second part of experiment, post hoc assessment of risk aversion was implemented in a sample of former participants of the asset market experiment (32 persons). The presented evidence suggests that risk aversion was not among the factors that had influence on individual engagement in trade activity or performance. It was concluded that in the sample, for which risk aversion measurements were obtained, experimental market outcomes were overconfidence and not risk aversion driven.
|Item Type:||MPRA Paper|
|Original Title:||Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets|
|Keywords:||overconfidence; individual behavior; experiment.|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C90 - General
C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior
|Depositing User:||Julija Michailova|
|Date Deposited:||04. Nov 2010 18:31|
|Last Modified:||12. Feb 2013 11:19|
Baker, K. H., Nofsinger, J. R., (2002), Psychological biases of investors. Financial Services Review, Vol. 11(2), p. 97-116.
Baker, R. J., Laury, S. K., Williams, A. W., (2008), Comparing small-group and individual behavior in lottery-choice experiment. Southern Economic Journal, Vol. 75, p. 367-382.
Barber, B. M., Odean, T., (2000), Trading is hazardous to your wealth: the common stock investment performance of individual investors. Journal of Finance, Vol. 55(2), p. 773-806.
Barber, B. M., Odean, T., (2001), Boys will be boys: gender, overconfidence, and common stock investment. Quarterly Journal of Economics, Vol. 116(1), p. 261-292.
Barber, B. M., Odean, T., (2002), Online investors: do the slow die first? Review of Financial Studies, Vol. 15(2), p. 455-487.
Benjamin, D., Brown., S., Shapiro, J., (2005), Who is behavioral? Harvard University Working Paper.
Benos, A., (1998), Aggressiveness and survival of overconfident traders. Journal of Financial Markets, Vol. 1, p. 353-383.
Biais, B., Hilton, D., Mazurier, K., Pouget, S., (2005), Judgmental overconfidence, self-monitoring and trading performance in an experimental financial market. Review of economic studies, Vol. 72(2), p. 287-312.
Binswanger, H., (1980), Attitudes towards risk: experimental measurement in rural India. American Journal of Agricultural Economics, Vol. 62, p. 395-407.
Brachinger, H.W., Schubert, R., Brown, M., Gysler, M., (1999), Financial decision making: are women really more risk averse? American Economic Review, Vol. 89(2), p. 381-385.
Camacho-Cuena, E., Requate, T., Waichman, I., (2009), Investment Incentives under Emission Trading: An Experimental Study. Working paper.
Chevalier, J., Ellison, G., (1999), Career concerns of mutual fund managers. Quarterly Journal of Economics, Vol. 114, p. 389-432.
Chuang, W. I., Lee, B. S, (2006), An empirical evaluation of the overconfidence hypothesis. Journal of Banking and Finance, Vol. 30(9), p. 2489-2515.
Croson, R., Gneezy, U., (2008), Gender differences in preferences. Journal of Economic Literature, Vol. 47(2), p. 1-27.
Deaves, R., Lüders, E., Luo, G. Y., (2009), An Experimental Test of the Impact of Overconfidence and Gender on Trading activity. Review of finance, Vol. 13(3), p. 555–575.
De Bondt, W. F. M., Thaler, R. H., (1994), Financial decision-making in markets and firms: a behavioral perspective. NBER Working Paper Nr. 4777.
De Long, J. B., Shleifer, A., Summers, L. H., Waldmann, R. J., (1991), The survival of noise traders in financial markets. The Journal of Business, Vol. 64(1), p. 1-19.
Dohmen, T., Falk, A., Huffman, D., Sunde, U., Schupp, J., Wagner, G. G., (2005), Individual risk attitudes: new evidence from a large, representative, experimentally-validated survey. Discussion Paper Nr. 1730.
Dohmen, T., Falk A., Huffman, D., Sunde, U., (2007), Are risk aversion and impatience related to cognitive ability? IZA Discussion Paper Nr. 2735.
Durand, R.B., Newby, R., Sanghani, J., (2006), An intimate portrait of the individual investor. University of Western Australia Working Paper.
Fellner, G., Maciejovsky, B., (2007), Risk attitude and market behavior: evidence from experimental asset markets. Journal of Economic Psychology, Vol. 28(3), p. 338-350.
Fenton-O’Creevy, M., Nicholson, N., Soane, E., Willman, P., (2003), Trading on illusions: unrealistic perceptions of control and trading performance. Journal of Occupational and Organizational Psychology, Vol. 76, p. 53–68.
Fischbacher, U., (2007), z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, Vol. 10(2), p. 171-178.
Fischhoff, B., Slovic, P., Lichtenstein, S., (1977), Knowing with certainty: the appropriateness of extreme confidence. Journal of Experimental Psychology: Human Perception and Performance, Vol. 3, p. 552-564.
Gysler M., Kruse, J., Schubert, R., (2002), Ambiguity and gender differences in financial decision making: an experimental examination of competence and confidence effects. CER-ETH Economics working paper series 02/23.
Giardini, F., Coricelli, G., Joffily, M., Sirigu A., (2008), Overconfidence in predictions as an effect of desirability bias. In Abdellaoui, M., and Hey, J.D. (Eds.), “Advances in Decision Making Under Risk and Uncertainty”, p. 163-180.
Gillette, A. B., Stevens, D. E., Watts, S. G., Williams, A. W., (1999), Price and volume reactions to public information releases: an experimental approach incorporating traders’ subjective beliefs. Contemporary Accounting Research, Vol. 16(3), p. 437-479.
Glaser, M., Nöth, M., Weber, M., (2003), Behavioral finance. In Koehler, D. J., and Harvey N. (Eds.), “Blackwell Handbook of Judgment and Decision Making”, p. 527-546.
Glaser, M., Weber, M., (2007), Overconfidence and trading volume. The Geneva Risk and Insurance Review, Vol. 32(1), p. 1-36.
Grable, J. E., (2000), Financial risk tolerance and additional factors that affect risk taking in everyday money matters. Journal of Business and Psychology, Vol. 14(4), p. 625-630
Fraser, S., Greene, F. J., (2006), The Effects of experience on entrepreneurial optimism and uncertainty. Economica, Vol. 73(290), p. 169-192.
Frederick, S., (2006), Cognitive reflection and decision making. Journal of Economic Perspectives, Vol. 19(4), p. 25-42.
Friedman, M., (1953), The case for flexible exchange rates. In “Essays in Positive Economics”, Chicago: University of Chicago Press, p. 157-203.
Grable, J.E., (2000), Financial risk tolerance and additional factors that affect risk taking in every day money matters. Journal of Business and Psychology, Vol. 14(4), p.625–630.
Gysler, M., Kruse, J., Schubert, R., (2002), Ambiguity and gender differences in financial decision making: an experimental examination of competence and confidence effects. CER-ETH Economics working paper series, Working paper Nr. 02/23.
Hanna, S., Lee, H., (1995), Empirical patterns of risk tolerance. Proceedings: Academy of Financial Services. Hariharan, G., Chapman, K.S.,Domian, D.L., (2000), Risk tolerance and asset allocation for investors nearing retirement. Financial Services Review, Vol. 9 (2), p.159–170.
Hirshleifer, D., Luo, G. Y., (2001), On the survival of overconfident traders in a competitive securities market. Journal of Financial Markets. Vol. 4, p. 73-84.
Hirota, S., Sunder, S., (2007), Price bubbles sans dividend anchors: evidence from laboratory stock markets. Journal of Economic Dynamics & Control, Vol. 31, p. 1875-1909.
Holt, Ch. A., Laury, S. K., (2002), Risk aversion and incentive effects. American Economic Review, Vol. 92(5), p.1644-1655.
Hong, H., Kubik, J.D., Solomon, A., (2000), Security analysts’ career concerns and herding of earnings forecasts. RAND Journal of Economics, Vol. 31(1), p.121–144.
Jianakoplos, N. A., Bernasek, A., (1998), Are women more risk averse? Economic Inquiry, Vol. 36, p. 620-630.
Keller, C., Siergist, M., (2006), Investing in stocks: the influence of financial risk attitude and values-related money and stock market attitudes. Journal of Economic Psychology, Vol. 27(2), p. 285–303.
Kyle, A., Wang, F. A., (1997), Speculation duopoly with agreement to disagree: can overconfidence survive the market test? Journal of Finance, Vol. 52, p. 2073-2090.
Lei, V., Noussair, Ch. N., Plott, Ch. R., (2001), Nonspeculative bubbles in experimental asset markets: lack of common knowledge of rationality vs. actual irrationality. Econometrica, Vol. 69(4), p. 831-859.
Kahneman D., Riepe, M. W., (1998), Aspects of investor psychology. Journal of Portfolio Management, Vol. 24(4), p. 52-65.
Kirchler, E., Maciejovsky, B., (2002), Simultaneous over- and underconfidence: evidence from experimental asset markets. Journal of Risk and Uncertainty, Springer, Vol. 25(1), p. 65-85.
Kourtidis, D., Šević, Ž., Chatzoglou, P., (2010), Investors’ trading activity: a behavioral perspective. International Journal of Trade and Global Markets, Vol. 3(1), p. 52–67.
Lakonishok, J., Shleifer, A., Vishny, R. W., (1992), The impact of institutional trading on stock prices. Journal of Financial Economics, Elsevier, Vol. 32(1), p. 23-43.
Menkhoff, L., Schmidt, U., Brozynski, T., (2006), The impact of experience on risk taking, overconfidence, and herding of fund managers: complementary survey evidence. European Economic Review, Vol. 50(7), p. 1753-1766
Mullainathan, S., Thaler, R., (2000), Behavioral economics. Massachusetts Institute of Technology Department of Economics Working Paper Series, Working Paper 00-27
Nöth, M., Weber, M., (2003), Information aggregation with random ordering: cascades and overconfidence. The Economic Journal, Vol. 113, p. 166-189.
Odean, T., (1998), Volume, volatility, price and profit when all traders are above average. Journal of Finance, Vol. 53(6), p. 1887-1934.
Odean, T., (1999), Do investors trade too much? American Economic Review, Vol. 89(5), p. 1278-1298.
Russo, J. E., Schoemaker, P. J. H., (1992), Managing Overconfidence. Sloan Management Review, Vol. 33, p. 7-17.
Roszkowski, M.J., (1998), Risk tolerance in financial decisions. In Cordell, D.M. (Ed.), “Readings in Financial Planning”, Bryn Mawr, PA: The American College, p.281–328.
Scheinkman, J. A., Xiong, W., (2003), Overconfidence and speculative bubbles. Journal of Political Economy, Vol. 111, p. 1183-1219.
Scheinkman, J. A., Xiong, W., (2004), Heterogeneous beliefs, speculation and trading in financial markets. In Carmona, R. A., Cinlar, E., Ekeland, I., Jouini, E., Scheinkman, J. A., and Touzi, N. (Eds.), “Paris-Princeton Lectures on Mathematical Finance”, p. 217-250.
Schmidt, U., Traub, S., (2002), An experimental test of loss aversion. Journal of Risk and Uncertainty, Vol. 25, p. 233-249.
Smith, V. L., Suchanek G. L., Williams A. W., (1988), Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets. Econometrica, Vol. 56(5), p. 1119-1151.
Sundén, A.E., Surette, B.J., (1998), Gender differences in the allocation of assets in retirement saving plans. The American Economic Review, Vol. 88(2), p.207–211.
Sung, J., Hanna, S., (1996), Factors related to risk tolerance. Financial Counseling and Planning, Vol. 7(1), p.11–20.
Yao, R., Hanna, S., (2005), The effect of gender and marital status on financial risk tolerance. Journal of Personal Finance, Vol. 4(1), p.66–85.
Available Versions of this Item
- Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets. (deposited 04. Nov 2010 18:31) [Currently Displayed]