measuring skill and chance in games abstract online and offline gaming has become a multi billion dollar industry yet games of chance in contrast to games of skill are prohibited or tightly regulated in many jurisdictions thus the question whether a game predominantly depends on skill or chance has important legal and regulatory implications in this paper we suggest a new empirical criterion for distinguishing games of skill from games of chance all players are ranked according to a best fit elo algorithm the wider the distribution of player ratings are in a game the more important is the role of skill most importantly we provide a new benchmark 50 chess that allows to decide whether games predominantly depend on chance as this criterion is often used by courts we apply the method to large datasets of various games e g chess poker backgammon our findings indicate that most popular online games including poker are below the threshold of 50 skill and thus depend predominantly on chance in fact poker contains about as much skill as chess when 75 of the chess results are replaced by a coin flip

survival of overconfidence in currency markets this paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses the paper s main finding is that overconfident currency dealers are not driven out of the market dealers with extensive experience are neither more nor less overconfident than their junior colleagues we set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence they underestimate uncertainty and they overestimate their professional success this is notable because one might have expected the opposite currency dealers face strong incentives for accuracy they have access to comprehensive information and they have extensive experience

boys will still be boys gender differences in trading activity are not due to differences in over confidence abstract the fact that men trade more than women in financial markets has been attributed to men s overconfidence however evidence supporting this view is only indirect we directly test this conjecture experimentally by measuring confidence using monetary incentives before participants trade in a simulated market we find that men are more confident than women in our trading task men also trade more and they hold larger and less diversified portfolios than women however we do not find that differences in confidence explain any portion of the gender gap in trading activity we explore alternative candidate channels such as risk aversion financial literacy or competitiveness but find that these factors are also unlikely to play a role

information technology and time based competition in financial markets this paper studies time based competition in imperfect securities markets linking it investment decisions information processing delays and trading strategies at the it investment stage traders trade off the cost of it against their anticipated trading profits at the trading stage each trader devises a trading strategy based on his new information while taking into account the impact of both his own trades and those of other traders in the market our results illustrate how traders react to market imperfections due to trading costs and information processing delays and how superior traders convert a timeliness advantage into higher trading profits they also shed light on the relationship between the price adjustment process and traders information processing delays timeliness imposes an interesting structure on trader competition traders with longer information processing delays trade less frequently submit smaller orders and enjoy lower profits per trade our analysis of traders it investment decisions demonstrates how factors such as it costs number of traders and the frequency and nature of new information affect the level of it investments we further illustrate how improved it infrastructure translates into competitive advantage

investor overconfidence and the forward premium puzzle we offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence in the model overconfident individuals overreact to their information about future inflation which causes greater overshooting in the forward rate than in the spot rate thus when agents observe a signal of higher future inflation the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate the model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behaviour of forward and spot exchange rates our approach is also consistent with the availability of profitable carry trade strategies

how trading institutions affect financial market performance some laboratory evidence i introduction trading institutions vary considerably across contemporary financial markets 1 but most can be classified into one of two basic types the continuous double auction da allows traders to submit public offers to buy or to sell and to accept other traders offers at any moment in time the double auction institution offers immediacy but non uniform transaction prices the other basic trading institution the clearinghouse ch gathers offers and clears them at a unified price at a pre specified time it sacrifices immediacy for uniform transaction prices 2 the two types of institutions have co existed and evolved for centuries but now are emerging in new electronic versions market participants and policy makers would like to know which institution or variant or combination is most efficient but theoretical and empirical work to date provides little guidance this paper reports on a series of laboratory asset markets experiments designed to compare variants of the double auction and clearinghouse trading institutions the markets are small usually with eight or nine traders but the traders are profit motivated and experienced with the trading institutions the traded asset has uncertain market value and traders receive useful but inconclusive private information they can only learn the asset s true value during the course of trade laboratory markets offer several advantages for empirical study of financial market institutions first private information is observable even controllable in the laboratory and therefore the investigator can directly measure market efficiency 3 second the complexity of the environment can be varied systematically in the laboratory and its effects on market performance can be separated from the effects of the market institution and other forces finally the market institution itself is controllable in the laboratory so it is possible to make valid causal inferences on how the market institution shapes market performance i begin with a survey of relevant literature and other preliminaries in the rest of this section section ii outlines the laboratory procedures the creation of trading environments of varying complexity the electronic implementation of the clearinghouse and double auction trading institutions the computation of theoretical benchmark prices and allocations and the measurement of market performance section iii collects the results following an illustrative account of a double auction trading period and a clearinghouse trading period i use descriptive statistics to summarize market performance in each of the thirty nine experiments the main conclusions are based on statistical comparisons of market performance across alternative market institutions the clearinghouse institution does surprisingly well it delivers greater market depth than the double auction discovers prices at least as efficiently and produces final allocations almost as efficient as the double auction the main institutional variants examined in this paper concern the amount of information made public regarding order placement orderflow the data suggest that public display of the orderflow enhances double auction efficiency but may impair clearinghouse efficiency a study of trading volume shows higher volume in the double auction in both institutions volume increases when important private news arrives and when the trading period is about to end the paper concludes with a brief summary and discussion of the results a companion paper friedman 1991 considers the effects of awarding various privileges to some but not all traders copeland and friedman 1987 1991 provide useful background information on laboratory procedures and computerized double auction markets instructions for the current experiments are available on request the need for empirical work a skeptic might argue that empirical work is unnecessary the mere fact that the double auction and clearinghouse institutions both persist in major financial markets implies that both are highly efficient because a more efficient institution would displace less efficient institutions

trading halts and market activity an analysis of volume at the open and the close this paper analyzes how the daily opening and closing of financial markets affect trading volume we model the desire to trade at the beginning and end of the day as a function of overnight return volatility nyse data from 1933 88 indicate that closing volume is positively related to expected overnight volatility while volume at the open is positively related to both expected and unexpected volatility from the previous night we interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed this desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

mr smith and the preachers the economics of religion in the wealth of nations the extension of economic analysis to problems beyond the domain of formal markets and explicit prices represents a major recent intellectual development but economic imperialism is not new and was not invented in chicago adam smith in his wealth of nations extended economic reasoning to a variety of nonmarket exchange problems one example is his analysis of religious behavior smith viewed participation in religion as a rational device by which individual enhanced the value of their human capital he also explained the behavior of the clergy and other suppliers of religious services from an economic perspective

overconfidence and social signalling evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others we test three theories that predict such relative overconfidence the first theory argues that overconfidence can be generated by bayesian updating from a common prior and truthful statements if individuals do not know their true type the second theory suggests that self image concerns asymmetrically affect the choice to receive new information about one s abilities and this asymmetry can produce overconfidence the third theory is that overconfidence is induced by the desire to send positive signals to others about one s own skill this suggests either a bias in judgement strategic lying or both we formulate this theory precisely using a large data set of relative ability judgements about two cognitive tests we reject the restrictions imposed by the bayesian model and also reject a key prediction of the self image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self image we provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors copyright 2013 oxford university press

progress in behavioral game theory i s game theory meant to describe actual choices by people and institutions or not it is remarkable how much game theory has been done while largely ignoring this question the seminal book by von neumann and morgenstern the theory of games and economic behavior was clearly about how rational players would play against others they knew were rational in more recent work game theorists are not always explicit about what they aim to describe or advise at one extreme highly mathematical analyses have proposed rationality requirements that people and firms are probably not smart enough to satisfy in everyday decisions at the other extreme adaptive and evolutionary approaches use very simple modelsmostly developed to describe nonhuman animals in which players may not realize they are playing a game at all when game theory does aim to describe behavior it often proceeds with a disturbingly low ratio of careful observation to theorizing this paper describes an approach called behavioral game theory which aims to describe actual behavior is driven by empirical observation mostly experiments and charts a middle course between over rational equilibrium analyses and under rational adaptive analyses the recipe for behavioral game theory i will describe has three steps start with a game or naturally occurring situation in which standard game theory makes a bold prediction based on one or two crucial principles if behavior differs from interested readers familiar with game theory should read crawford 1997 whose approach is more eclectic than mine he concludes p 236 that most strategic behavior can be understood via a synthesis that combines elements from each of the leading theoretical frameworks traditional game theory evolutionary game theory and adaptive learning with a modicum of empirical information about behavior behavioral game theory adds psychological interpretations to this synthesis

an empirical evaluation of the overconfidence hypothesis abstract recently several behavioral finance models based on the overconfidence hypothesis have been proposed to explain anomalous findings including a short term continuation momentum and a long term reversal in stock returns we characterize the overconfidence hypothesis by the following four testable implications first if investors are overconfident they overreact to private information and underreact to public information second market gains make overconfident investors trade more aggressively in subsequent periods third excessive trading of overconfident investors in securities markets contributes to the observed excessive volatility fourth overconfident investors underestimate risk and trade more in riskier securities to document the presence of overconfidence in financial markets we empirically evaluate these four hypotheses using aggregate data overall we find empirical evidence in support of the four hypotheses

overconfidence as a social bias experimental evidence abstract the overconfidence bias is discussed extensively in economic studies yet fails to hold experimentally once monetary incentives and feedback are implemented we consider overconfidence as a social bias for a simple real effort task we show that individually economic conditions effectively prevent overconfidence by contrast the introduction of a very basic purely observational social setting fosters overconfident self assessments additionally observing others actions effectively eliminates underconfidence compared to the individual setting

intraday price reversals for index futures in the us and hong kong abstract we observe intraday price reversals following large price changes at the opening of the s p 500 futures market and the hsi futures market we note that the magnitude of subsequent price reversals is positively related to the initial price changes and that the price reversals are not caused by a bid ask spread or by panic among investors we also note that such price reversals can be exploited to give rise to profitable opportunities after transaction costs even though these may not be very significant this study shows that investor overreaction may be a universal phenomenon and irrational investor behavior like overreaction may also exist among groups of sophisticated investors

judgmental overconfidence and trading activity abstract we investigate the theoretically proposed link between judgmental overconfidence and trading activity in addition to applying classical measures of miscalibration we introduce a measure to capture misperception of signal reliability which is the relevant bias in the theoretical overconfidence literature we relate the obtained overconfidence measures to trading activity in call and continuous experimental asset markets our results confirm prior findings that classical miscalibration measures are not related to trading activity misperception of signal reliability is positively related to trading volume in the continuous market for one of two treatments in the other one no relation is found except that highly overconfident subjects trade less in addition we find that men trade more than women at high levels of risk aversion but the gender trading gap vanishes as risk aversion lessens the reason is that the trading activity of women seems to be more sensitive to risk attitudes than that of men

tithing and religious charitable giving in america the concept of religious tithing giving 10 or more of one s income to religious organizations permeates ancient and contemporary religious literature yet the degree to which households apply this construct in their charitable giving practices remains unclear this study examines the practice of tithing using data from a national expenditures survey including 56 663 households despite the pervasiveness of the tithing concept religious donors did not appear to be targeting a specific 10 giving level this may have resulted from varied definitions of income for tithing purposes or the presence of small charitable gifts made without reference to income while the likelihood of religious giving increased with income the likelihood of tithing fell dramatically as a group tithers had less income but were wealthier more educated older and gave more to nonreligious charity than did other households religious tithers who also gave to nonreligious charities were wealthier older and more highly educ

behavioral uncertainty and the dynamics of traders confidence in their price forecasts by how much does the presence of behavioral uncertainty in an experimental asset market reduce subjects confidence in their price forecasts an incentivized interval forecast elicitation method is employed to answer this question each market consists of six traders and the value of dividends is known two treatments are considered six human traders 6h and one human interacting with five computer traders whose behavior is known 1h5c we find that while the deviation of the initial price forecasts from fundamental value is smaller in the 1h5c treatment than in the 6h treatment albeit not statistically significantly the average confidence regarding the forecasts is not we further analyze the relationships between subjects confidence in their forecasts and their trading behavior as well as their trading performance in the 6h treatment while subjects high confidence in their short term forecasts shows a negative correlation with their trading performance high confidence in their long term forecasts shows a positive correlation with trading performance

consolidation fragmentation and market performance this paper studies the impact of market consolidation or fragmentation on its performance examining four alternative models of exchange a consolidated clearing house fragmented clearing houses a monopoly dealer market and an interdealer market the effects of the market mechanism on the expected quantity traded the price variance faced by individual traders the quality of market price signals the expected gains from trade and the exchange implementation costs are studied

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

judgemental overconfidence self monitoring and trading performance in an experimental financial market we measure the degree of overconfidence in judgment in the form of miscalibration i e the tendency to overestimate the precision of one s information and self monitoring a form of attentiveness to social cues of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information miscalibrated traders underestimating the conditional uncertainty about the asset value are expected to be especially vulnerable to the winner s curse high self monitors are expected to behave strategically and achieve superior results our empirical results show that miscalibration reduces and self monitoring enhances trading performance the effect of the psychological variables is strong for men but non existent for women

the dynamics of overconfidence evidence from stock market forecasters as a group market forecasters are overconfident in the sense that they are miscalibrated while overconfidence is persistent respondents do exhibit some degree of rational learning in that they widen confidence intervals after failure as much as they narrow them after success market experience exacerbates overconfidence primarily through knowledge deterioration

experience and confidence in an internet based asset market experiment the experience effect in asset markets is one that was thought to be settled as subjects gained experience with the interface and each other they typically exhibit fewer instances of mispricing and at lower magnitudes but questions regarding trading experience are not easy to address in the lab with the typical subject pool since the kind of experience one can typically generate in the lab is experience with the experimental environment itself not with external environments however in virtual worlds asset markets are highly evolved providing a subject pool with skilled and experienced traders that can be accessed via the internet this study compares experimental asset markets with participants recruited from virtual world trading groups to experimental markets with participants recruited from the virtual world at large i further examine trader performance and trading behavior within markets the findings indicate that asset markets with virtual world participants recruited from trading groups are more prone to exhibit bubbles than are markets with virtual world participants recruited at large within condition experienced traders are less likely to follow fundamentals and more likely to engage in strategies that result in loss of earnings excess confidence is rejected as an explanation for this pattern as confidence is found to be related to higher earnings and fundamental value trading strategies

hindsight bias risk perception and investment performance once they have observed information hindsight biased agents fail to remember how ignorant they were initially they knew it all along we formulate a theoretical model of this bias providing a foundation for empirical measures and implying that hindsight biased agents learning about volatility will underestimate it in an experiment involving 66 students from mannheim university we find that hindsight bias reduces volatility estimates in another experiment involving 85 investment bankers in london and frankfurt we find that more biased agents have lower performance these findings are robust to differences in location information overconfidence and experience

individualism and stock price crash risk employing a sample of 26 473 firms across 42 countries from 1990 to 2013 we find that firms located in countries with higher individualism have higher stock price crash risk furthermore individualism can be transmitted by foreign investors from overseas markets to influence local firms crash risk and can exacerbate the impact of firm risk taking and earnings management on crash risk moreover the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country level financial information transparency and the adoption of international financial reporting standards

transitory price changes and price limit rules evidence from the tokyo stock exchange we compare the volatility of 24 hour returns computed from the opening and closing prices of a diverse sample of tokyo stock exchange tse stocks we find that volatility at the open is greater than volatility at the close only for the most actively traded tse stocks daytime and overnight return covariances suggest that the volatility patterns are explained by the effect of implicit bid ask spreads at the open and partial price adjustment at the close both of which are related to the intensity of trading our results challenge the view that open to open returns are more volatile than close to close returns for stocks in general and are consistent with the hypothesis that tse price limit rules have a significant impact on the dynamics of security prices

abnormal expected utility and event study abnormal returns abstract event study is employed by measuring the abnormal return around the event date if risk changes this methodology is questionable we suggest the concept of abnormal expect utility which relies on the whole distribution and not just the mean return

entry and competitive structure in deregulated airline markets an event study analysis of people express this paper proposes an alternative approach to the study of competitive structure in deregulated airline markets that avoids some of the weaknesses of previous studies this approach uses reactions of incumbent airlines stock prices to announcements of entry by people express to shed light on competitive structure these stock reactions reveal significant route specific profits or sunk costs and also provide evidence on the degree of competitive localization present in the industry the conclusions emerging from this analysis are corroborated by an examination of price sales quantity and schedule changes that followed people express entry

irrationality and beliefs in a laboratory asset market is it me or is it you abstract this paper reports on an experiment designed to examine individual and market outcomes with a mixture of rational and non rational traders using values elicited via auctions we measure a specific form of irrationality the tendency to overweight high payoff low probability events or probability judgment error subjects are classified by their tendency to exhibit errors as well as their beliefs regarding whether others will make errors subjects then participate in a series of double auction markets the results indicate that both probability judgment error and beliefs about other subjects susceptibility to probability judgment error have significant impact on individual and market outcomes

the effects of resale price maintenance on shareholder wealth the consequences of schwegmann event study methodology is used to assess the effects of the 1951 u s supreme court schwegmann decision which severely weakened the enforcement of resale price maintenance contracts in the united states overall upstream industries with heavy resale price maintenance usage apparently were not adversely affected by the decision among large retailing groups a positive effect of the decision was found for department stores cross section tests of the motives for the adoption of resale price maintenance provide support for hypotheses based on free ridership dealer cartels and to a lesser extent protection of product reputation copyright 1994 by blackwell publishing ltd

windfall profits and vertical relationships who gained in the japanese auto industry from vers this paper employs an event study to analyze the effect of the 1981 voluntary export restraint agreements on profits in the japanese automobile industry stock price movements of seven japanese automakers and sixty nine of their suppliers are examined the results indicate that the profits of japan s producers of passenger cars rose as a result of the voluntary export restraints while only some suppliers large ones and those producing specialized parts or services appear to have shared the benefits voluntary export restraints increased profits for some firms in the japanese auto industry but many suppliers did not share the windfall copyright 1993 by blackwell publishing ltd

electronic trading system and returns volatility in the oil futures market this paper uses daily brent crude prices to investigate the employment of electronic trading on the returns conditional volatility in the oil futures market after a suitable garch model is established the conditional volatility series are found the bai and perron model is then used to find two significant structural breaks for these conditional volatility series around two implementation dates of electronic trading this result indicates that the change in the trading system has significant impacts on the returns volatility since our estimated second break date is very close to the all electronic trade implementation date moreover the conditional volatility in the all electronic trading period is found to be more dominated by the temporal persistence rather than the volatility clustering effect all these evidence can shed some light for explaining the high relationship between more volatile world oil price and the more popular electronic trade

market behavior in a clearing house one of the most fundamental market mechanisms is the clearing house where orders are accumulated over time and the market is cleared periodically the issue addressed in this study is the statistical behavior of the market under this neutral mechanism in the framework of a tractable stochastic model which captures the underlying uncertainties and indivisibilities in the demand and supply schedules applying renewal theory we derive closed form results for the behavior of prices and quantities and pursue the implications of the possibility of no trade and the multiplicity of market clearing prices

asset markets with insider trading disclosure rule and reselling constraint an experimental analysis abstract we investigate the impact of compulsory insider trading disclosure and its combination with a mandatory holding rule on price predictability and asset mispricing we modify the dynamic price adjustment model to account for insiders private information our results show that insiders produce weakly characterized price signals that induce a less than proportional price adjustment to the changes in the dividend value in both markets with disclosure rule and holding requirement in comparison with unregulated markets a shift in insiders strategies from information motivated to liquidity motivated trading appears to fuel the impairment of price predictability in regulated markets the exacerbation of asset mispricing in markets with holding restriction is characterized by a growth in the speculative transactions and loss making trading proposals

a concentration index for differentiated products the case of religious competition in the past scholars have used a herfindahl hirschman index using denominational market shares to measure the competitiveness of religious markets however this approach ignores both the imperfect substitutability between denominations and the degree of competition within denominations these two shortcomings make the current index a suspect measure of religious competition it often falsely identifies which market micro economists would generally consider the more competitive one we develop a new religious competition index that incorporates intra denominational competition and creates a substitutability parameter to better specify the appropriate degree of inter denominational competition while the model developed in this article applies specifically to religious markets our index of competition could be expanded to other economic markets where such a substitutability parameter is meaningful

market quality changes in the london stock market this paper examines the impact that the introduction of a closing call auction had on market quality at the london stock exchange using estimates from the partial adjustment with noise model of amihud and mendelson amihud y mendelson h 1987 trading mechanisms and stock returns an empirical investigation journal of finance 42 533 553 we show that opening and closing market quality improved for participating stocks when we stratify our sample securities into five groups based on trading activity we find that the least active securities experience the greatest improvements to market quality a control sample of stocks are not characterized by discernable changes to market quality

portfolio choice and risk attitudes an experiment i introduction suppose an investor is faced with a decision concerning how to allocate financial resources between a risky lottery asset with a higher expected return and an asset with a fixed and guaranteed lower return is the choice of portfolio independent of preferences outside the standard neoclassical model in experiments with financial incentives we study how portfolio choice depends on three well documented behavioral phenomena ambiguity aversion the illusion of control and myopic loss aversion we also investigate whether participants are willing to explicitly pay a small sum of money to indulge such preferences pay for more perceived control less ambiguity or more frequent opportunities to change the portfolio based on feedback about its performance while standard finance theory presumes that investors successfully identify and process information relevant to reaching optimal decisions in recent years a body of empirical evidence suggests that there are systematic departures from this behavior behavioral finance is concerned with psychological influences in financial decision making and markets investors make decisions while trying to stay afloat in a sea of uncertainty when predictability is low people may be prone to unjustified beliefs that may survive and even flourish in such an environment 1 people may resort to rules of thumb on a conscious or subconscious level to the extent that psychological influences are present it is economically important to consider which of these actually affect risk attitudes and portfolio choice a key issue is whether any such influences disappear when monetary incentives are present we pursue a systematic experimental comparison of three of the most prominent behavioral phenomena documented in the literature the illusion of control langer 1975 is concerned with greater confidence in one s predictive ability or in a favorable outcome when one has a higher degree of personal involvement even when one s involvement is not actually relevant ambiguity aversion ellsberg 1961 is the desire to avoid unclear circumstances even when this will not increase the expected utility myopic loss aversion benartzi and thaler 1995 combines loss aversion kahneman and tversky 1979 tversky and kahneman 1992 and a tendency to evaluate outcomes frequently this combination leads investors to be more willing to invest a greater proportion of their portfolio in risky assets if they evaluate their investments less frequently we show that these phenomena are present with monetary incentives and also investigate whether people are willing to pay money to accommodate such preferences or whether they are closer to the rational model when incentives are present with the procedure we chose the willingness to actually pa for such preferences depends on the preference the great majority of investors pay for less ambiguity or more frequent feedback investment opportunities but fewer than 10 pay to roll a determinative die themselves 2 we then examine how the preferences between lotteries in the different treatments affect portfolio choice we have participants allocate their investment capital between an asset with a sure return and a risky asset with a higher expected rate of return in fact there is very little variation in investment behavior across any of the illusion of control or ambiguity aversion treatments in contrast the results found in previous experimental studies of myopic loss aversion suggest that participants invest less in their preferred option the main conclusion we draw from these findings is that the relation between which procedure or lottery people prefer and how much they are willing to actually invest in this lottery is not trivial at all people are generally unwilling to pay even small amounts of money to indulge the illusion of control and it does not influence their portfolio choice people are generally willing to pay money for less ambiguity but having less ambiguity does not influence their portfolio choice finally in some cases people are willing to pay money for more frequent feedback and opportunities to change their portfolio but again previous studies have shown that people invest less with this additional information and greater flexibility

how much information is incorporated in financial asset prices experimental evidence we propose a new estimation method and use experimental data from multiple double auction experiments in the literature to directly estimate how much information is incorporated in financial market prices we find that public information is almost completely reflected in prices but that surprisingly little private information less than 50 is incorporated in prices our estimates therefore suggest that while semi strong informational efficiency is consistent with the data financial market prices may be very far from strong form efficiency we compare our estimates with beliefs of economists surveyed at the econometric society meetings and find that economists and finance researchers alike expect market prices to reflect considerably more private information than what we estimated

confidence and decision making in experimental asset markets abstract this paper examines how traders confidence and market confidence affect outcomes in an experimental asset market with known fundamental values in this type of market prices usually present large deviations from the fundamental value in other words bubbles are known to occur we measure beliefs by asking participants to forecast the one period ahead price as a discrete probability mass distribution we define confidence as the inverse of the dispersion of beliefs for each trader and also create a market wide measure of this to measure agreement across traders we find that confidence affects price formation and is also important in explaining the dynamics and size of the bubble moreover as traders are successful they become increasingly certain of their beliefs even if these beliefs are on non fundamental values thus increasing the likelihood of price bubbles

the economics of regional variation in religious attendance developments in modelling the demand for religion have identified both religious human capital and religious market structure as fundamental determinants of levels of formal religious practice in this paper these theories are confronted with survey data drawn from 163 regions across 16 countries although there are clearly political historical and other country specific factors that affect levels of participation in organized religion estimates from modified logit regression equations demonstrate the empirical significance at the regional level of variables suggested by recent innovations in the economics of religious behaviour

capital market response to emission rights returns evidence from the european power sector prior studies on the distributional effects of the european union s emission trading scheme eu ets have so far only relied on supply and demand data empirical evidence from capital markets has been missing we address this gap and measure the ets s economic consequences using the expectations of investors towards the regulatory impact on firm value employing a multifactor model we show that returns on common stock of the largest affected industry power generation are positively correlated with rising prices for emission rights this implies that the market predicts that firms are not only able to pass on their share of the regulatory burden to customers but even achieve windfall profits by overcompensating for the costs

the impact of experience on risk taking overconfidence and herding of fund managers complementary survey evidence abstract empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues if the portfolios of inexperienced are not more risky this result would contradict the hypothesis of market efficiency therefore it is an important question whether inexperienced fund managers tend to taker higher risks higher risk taking may be explained by a higher degree of overconfidence less herding behavior or a lower degree of risk aversion since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 german fund managers which can improve our understanding in this field in line with the results of previous studies we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed nevertheless our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks

the regulation of electricity results from an event study in this paper event study methods are used to compare the stock market returns for the recs with general stock market returns to test the hypothesis that the regulatory package shows symptoms of capture by special interest groups over the 1991 95 period the results show that some capture by the recs may have occurred as they have earned abnormal market returns however regulatory events are heterogeneous in nature and actions taken over prices by the director general of electricity supply dges in 1995 appear to have reduced abnormal returns as part of the study we examine the impact on shareholders returns of the dges s controversial announcement in march 1995 of plans to tighten price controls on the recs the regulatory package appears to work reasonably well on balance

the bull of wall street experimental analysis of testosterone and asset trading 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

price adjustment delays and arbitrage costs evidence from the behavior of convertible preferred prices price adjustment delays occur between in the money convertible preferred stock prices and common stock prices convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks the price predictability stems from price changes in the underlying common stocks leading the price changes in the convertible preferred stocks by up to nine hours cross sectionally about 70 percent of the variation in the unsigned size of the price deviations is explained by proxies for costs of arbitrage

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

arrogance can be a virtue overconfidence information acquisition and market efficiency abstract in behavioral finance overconfidence has been established as a prevalent psychological bias which can make markets less efficient by creating mispricing in the form of excess volatility and return predictability in this paper we develop a model in which overconfidence causes investors to overinvest in information acquisition when this information could improve market efficiency by driving prices closer to true values we study the impact of overconfidence on mispricing and information acquisition comparing their net effect on prices we derive several novel implications first overconfidence generally improves market pricing provided the level of overconfidence is not too high pricing can also improve even when overconfidence is arbitrarily high depending on the amount of private information acquired relative to publicly available information

the trading decision and market clearing under transaction price uncertainty this paper models an individual s trading decision given 1 his her demand function to hold shares of an asset 2 his her expectation on what the market clearing price will be and 3 the design of the market which determines how orders will be translated into trades the particular market design we consider is the batched trading periodic call regime assuming investors are distributed according to their propensities to hold shares we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which with trading friction these solutions differ from pareto efficient values the importance of this analysis for various issues concerning market design is noted when markets are not frictionless and transaction prices are uncertain the act of trading requires analysis this paper models an individual s trading decision in secondary financial asset markets in so doing we study the order flow as an endogenous part of the system we show how given an underlying demand curve the trader will choose an optimal price quantity order to transmit to the market and we model the aggregation of orders to obtain market clearing values for price and volume these models are used to show the way in which the prices and trading volume established on the market will in general differ from their pareto efficient values much of the microstructure literature that studies the behavior of transaction prices in a nonfrictionless market has assumed that orders are generated by some exogenously given stochastic process this has been true for instance in the

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

is financial instability male driven gender and cognitive skills in experimental asset markets abstract the hypothesis that price stability would reliably increase with the fraction of women operating in financial markets has been frequently suggested in policy discussions to test this hypothesis we conducted 10 male only 10 female only and 10 mixed gender experimental asset markets and compared the effects of gender composition confidence risk attitude and cognitive skills male and female markets have comparable volatility and deviations from fundamentals whereas mixed gender markets are substantially more stable on the other hand higher average cognitive skills of the group are associated with reduced market volatility individual level analysis shows that subjects with higher cognitive skills trade at prices closer to fundamental values and earn significantly higher profits similarly mixed markets exhibit lower mispricing particularly for traders with lower cognitive skills our results are demonstrated to hold in other experimental asset market studies suggesting that a mixed gender composition reduces mispricing across different types of asset markets

can observers predict trustworthiness abstract we investigate whether experimental subjects can predict behavior in a prisoner s dilemma played on a tv show subjects report probabilistic beliefs that a player cooperates before and after the players communicate subjects correctly predict that women and players who make a voluntary promise are more likely to cooperate they are able to distinguish truth from lies when a player is asked about her intentions by the host subjects are to some extent able to predict behavior their beliefs are 7 percentage points higher for cooperators than for defectors we also study their bayesian updating beliefs do not satisfy the martingale property and display mean reversion

trading and returns under periodic market closures this paper studies how market closures affect investors trading policies and the resulting return generating process it shows that closures generate rich patterns of time variation in trading and returns including those consistent with empirical findings 1 u shaped patterns in the mean and volatility of returns over trading periods 2 higher trading activity around the close and open 3 more volatile open to open returns than close to close returns 4 higher returns over trading periods than over nontrading periods 5 more volatile returns over trading periods than over nontrading periods it also shows that closures can make prices more informative about future payoffs we model a competitive stock market with periodic closures in which investors trade for both allocational and informational reasons we use the model to study how market closures intrinsically affect investors trading behavior and the return generating process the purpose of this analysis is to increase our understanding of the time variation in security trading and returns that are associated with regular market closures such as the intraday and intraweek patterns in stock returns volatility and trading volume we consider a stock market in which the exogenous information flow is homogeneous over time and the market closes periodically when the market is open investors trade the stock either to rebalance their overall portfolio of assets which also includes other illiquid assets or to speculate on future stock payoffs using their private information in particular investors adjust their asset portfolio by trading the stock in order to hedge the risk of illiquid assets we refer to these trades as hedging trades and those motivated by private information as speculative trades when the market is closed hong is from the graduate school of business stanford university and wang is from the sloan school of management massachusetts institute of technology and nber the authors thank jennifer huang for programming assistance and an anonymous referee for many valuable suggestions they also thank glenn ellison john heaton craig holden andrew lo steve slezak jeremy stein rene stulz the editor the nber asset pricing lunch group and par

an examination of stock market return volatility during overnight and intraday periods 1964 1989 this paper examines the variance of hourly market returns during 1964 89 results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods market variance is also shown to change significantly over time rising after nasdaq began in 1971 rising after trading in stock options began in 1973 falling after fixed commissions were eliminated in 1975 rising after trading in stock index futures was introduced in 1982 and falling after margin requirements for stock index futures became larger in 1988 copyright 1990 by american finance association

calendar anomalies abnormal returns at calendar turning points 1988 calendar anomalies abnormal returns at calendar turning points financial analysts journal vol 44 no 6 pp 28 39

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

the rise and fall of railtrack plc an event study forming railtrack was a key part of the privatization of british rail br railtrack took over the ownership of br s fixed infrastructure in april 1994 and its parent company the railtrack group was floated in may 1996 on the london stock exchange lse despite the group posting some excellent financial results in the early years railtrack s record on infrastructure improvement and safety was frequently criticized this apparent inconsistency between shareholder interests and public service obligations culminated in railtrack being placed in administration in october 2001 in view of this apparent inconsistency and the high court claim for additional compensation brought against the government by a group of 49 000 small investors the reaction of the stock market to 19 key events is modelled among other things we find when railtrack announced after the fatal derailment of a high speed train near the hertfordshire town of hatfield that there would be a 6 month programme of emergency track repairs t

trading as entertainment among 1 000 german brokerage clients for whom both survey responses and actual trading records are available investors who report enjoying investing or gambling turn over their portfolio at twice the rate of their peers including entertainment attributes as additional explanatory variables in cross sectional regressions of portfolio turnover on objective investor attributes more than doubles the fraction of the total variation of portfolio turnover that can be explained the results are robust to controlling for gender and proxies for overconfidence constructed from survey responses nonpecuniary benefits of trading thus appear to offer a straightforward explanation of the excessive trading puzzle

determinants of regulatory policies toward competition in the electric utility industry statistical results from this study generally support the stigler peltzman theory of regulation the only finding not consistent with peltzman s formulation of the theory is that electd officials are more likely to favor procompetitive policies than appointed officials peltzman has argued this should be an unimportant factor for public policy purposes however it seems that any movement toward elected regulatory commissions would tend to foster pro competitive policies at least in the short run

random competitive exchange price distributions and gains from trade abstract this paper studies the behavior of a competitive exchange under uncertain preferences and random indivisible endowments we obtain explicit closed form results for the price distribution and expected gains from trade both for case where the market is thin and the number of traders is low and for the asymptotic case where the number of traders tends to infinity we demonstrate that increasing the number of traders reduces price variability and increases the expected gains from trade and that increasing the variability of traders reservation prices increases price variability as well as the expected asymptotic gains from trade