Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment

Christophe Bisière, Jean-Paul Décamps and Stefano Lovo

No 552, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: We conduct a series of experiments that simulate trading in financial markets and which allows us to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. We 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. We find evidence of non-Bayesian belief updating (confirmation bias and under-confidence). This reduces (improves) market efficiency when subjects’ prior beliefs are weak (strong).

JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 2009-05, Revised 2012-05
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp and nep-upt
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http://idei.fr/sites/default/files/medias/doc/by/bisiere/risk_attitude_2012.pdf Forthcoming in Management Science (application/pdf)

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 (2009)
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:ide:wpaper:20671

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