Speculative Bubbles - An Introduction and Application of the Speculation Elicitation Task (SET)

Janssen, Dirk-Jan; Weitzel, Utz; Füllbrunn, Sascha

doi:10.2139/ssrn.2577867

Cited by 6 publications

(3 citation statements)

References 49 publications

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“…For example, participants scoring well in the cognitive reflection test (Frederick 2005) achieve higher profits in laboratory spot markets (Corgnet et al 2013), and in spot markets with an added futures market (Noussair, Tucker, and Xu 2014); their trading style is less focused on momentum and more on fundamental value (Baghestanian, Lugovskyy, and Puzzello 2012). On the other hand, Bruguier, Quartz, and Bossaerts (2010) do not find that cognitive ability is related to the ability to correctly predict asset prices, and Janssen, Weitzel, and Füllbrunn (2015) find no correlation between CRT and behavior in their speculation task. Concerning aggregate outcomes, markets with traders exhibiting higher average analytical abilities produce lower price volatility (Breaban and Noussair 2015;Cueva and Rustichini 2015).…”

Section: Related Literaturementioning

confidence: 84%

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe propose that heterogeneous asset trading behavior is the result of two distinct, non-convertible mental dimensions: analytical ("quantitative") capability and mentalizing ("perspective-taking") capability. We develop a framework of mental capabilities that yields testable predictions about individual trading behavior, revenue distribution and aggregate outcomes. The two-dimensional structure of mental capabilities predicts the existence of four mental types with distinguishable trading patterns and revenues. Individuals will trade most successfully if and only if they have both capabilities. On the other hand, subjects who can mentalize well but have poor analytical capability will suffer the largest losses. As a consequence, being able in just one dimension does not assure trading success. We test these implications in a laboratory environment, where we first independently elicit subjects' capabilities in both dimensions and then conduct a standard asset market experiment. We find that individual trading gains and patterns are consistent with our theoretical predictions. Our results suggest that two mental dimensions are necessary to encompass the complex heterogeneous behaviors in asset markets; a one-dimensional measure of mental capability will lead to biased conclusions. The findings have potential implications for financial institutions, which can use the measures to select successful traders, or for policy-makers, helping them to prevent the formation of asset bubbles. Finally, our conceptual framework and the empirical screening method could be applied to explain heterogeneous behavior in other games.

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Section: Related Literaturementioning

confidence: 84%

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

2016

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“…Other studies have measured the effects of individual trader traits, such as gender (Eckel and Füllbrunn 2015), business experience (Smith et al 1993), cognitive abilities (Bosch-Rosa et al 2015), overconfidence (Biais et al 2005, Michailova andSchmidt 2016), their own and others' irrationality (Cheung et al 2014, Hargreaves Heap andZizzo 2012), and an individual proclivity to speculate (Janssen et al 2015) on prices and trading patterns. Further, to quantify the effects of traders' psychological states on prices and trading behavior, recent studies have manipulated emotion (Andrade et al 2015, Lahav andMeer 2012) and confusion (Kirchler et al 2012).…”

Section: Experimental Financial Marketsmentioning

confidence: 99%

The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading

et al. 2018

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Growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets. Testosterone, a chemical messenger especially influential in male physiology, has been shown to affect economic decision making and is taken as a performance enhancer among some financial professionals. This is the first experimental study to test how testosterone causally affects trading and prices. We exogenously elevated testosterone in male traders and tested testosterone's effect both on their trading behavior in experimental asset markets and on the size and duration of asset price bubbles. Using both aggregated and individual trading data, we find that testosterone administration generated larger and longer-lasting bubbles by causing high bids and the slow incorporation of the asset's fundamental value.

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“…In fact, experimental tests show that individuals who speculate a lot in this game also produce stronger bubbles and crashes in more realistic and dynamic double auction trading environments (Janssen et al, 2015).…”

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confidence: 98%

Randomness and the Madness of Crowds

Weitzel

Rosenkranz

2016

The Frontiers Collection

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Human interaction often appears to be random and at times even chaotic. We use game theory, the mathematical study of interactive decision making, to explain the role of rationality and randomness in strategic behavior. In many of these situations, humans deliberately create randomness as a best response and equilibrium strategy. Moreover, once out of equilibrium, individual beliefs about the real intentions of others introduce signicant randomness into otherwise quite simple and deterministic situations of interaction. In a second step we discuss the role of randomness on nancial markets, which are prototypical institutions for the aggregation of individual behavior. As in certain simple games, nancial markets can produce outcomes that are close to perfect randomness. In fact, random walks in nancial returns are considered by most scholars to be ecient and desirable. Finally, we apply game theoretical insights to behavior on nancial markets and show how strategic speculation oǹ greater fools' can create a`madness of crowds' that often ends in chaotic swings, bubbles and crashes.

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Speculative Bubbles - An Introduction and Application of the Speculation Elicitation Task (SET)

Cited by 6 publications

References 49 publications

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment

The Bull of Wall Street: Experimental Analysis of Testosterone and Asset Trading

Randomness and the Madness of Crowds

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