Do Psychological Fallacies Influence Trading in Financial Markets? Evidence from the Foreign Exchange Market

Michael Bleaney, Spiros Bougheas and Zhiyong Li

No 2014-17, Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham

Abstract: Research in both economics and psychology suggests that, when agents predict the next value of a random series, they frequently exhibit two types of biases, which are called the gambler’s fallacy (GF) and the hot hand fallacy. The gambler’s fallacy is to expect a negative correlation in a process which is in fact random. The hot hands fallacy is more or less the opposite of this – to believe that another heads is more likely after a run of heads. The evidence for these fallacies comes largely from situations where they are not punished (lotteries, casinos and laboratory experiments with random returns). In many real-world situations, such as in financial markets, succumbing to fallacies is costly, which gives an incentive to overcome them. The present study is based on high-frequency data from a market-maker in the foreign exchange market. Trading behaviour is only partly explained by the rational exploitation of past patterns in the data, but there is also evidence of the gambler’s fallacy: a tendency to sell the dollar after it has risen persistently or strongly.

Keywords: Gambler’s Fallacy; Hot hand Fallacy; Foreign Exchange Market (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cbe and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.nottingham.ac.uk/cedex/documents/paper ... on-paper-2014-17.pdf (application/pdf)

Related works:
Journal Article: Do Psychological Fallacies Influence Trading in Financial Markets? Evidence from the Foreign Exchange Market (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:not:notcdx:2014-17

Access Statistics for this paper

More papers in Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham School of Economics University of Nottingham University Park Nottingham NG7 2RD. Contact information at EDIRC.
Bibliographic data for series maintained by Jose V Guinot Saporta ().