Risk attitude, beliefs updating and the information content of trades: an experiment

Stefano Lovo, Christophe Bisière and Jean-Paul Décamps

No 917, HEC Research Papers Series from HEC Paris

Abstract: In this paper, the authors conduct a series of experiments that simulate trading in financial markets and which allows them to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. They find that there are very few risk-neutral subjects and that subjects displaying risk aversion or risk-loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. Consequently, private information struggles penetrating trading prices. The authors find evidence of non-Bayesian belief updating (confirmation bias and under-confidence). This reduces (improves) market efficiency when subjects’ prior beliefs are weak (strong).

Keywords: risk attitude; financial market; information; belief; risk-neutral information (search for similar items in EconPapers)
JEL-codes: F16 F17 F18 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-05-19
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp and nep-upt
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Related works:
Journal Article: Risk Attitude, Beliefs Updating, and the Information Content of Trades: An Experiment (2015)
Working Paper: Risk Attitude, Beliefs Updating, and the Information Content of Trades: An Experiment (2015)
Working Paper: Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment (2012)
Working Paper: Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment (2012)
Working Paper: Risk attitude, beliefs updating and the information content of trades: an experiment (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0917

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