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Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets

Nobuyuki Hanaki (), Eizo Akiyama (), Yukihiko Funaki and Ryuichiro Ishikawa ()
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Yukihiko Funaki: School of political science and economics, Waseda University - Waseda university
Ryuichiro Ishikawa: Faculty of Engineering, Information and Systems, University of Tsukuba - University of Tsukuba

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Abstract: Does diversity of cognitive ability among market participants increase mispricing? Does common knowledge of heterogeneity in relation to cognitive ability of market participants further increase mispricing? We investigated these questions by measuring subjects' cognitive ability and categorizing those above median ability as type `H' and those below median ability as type `L'. We then constructed three market types, each containing six traders: 6H, 6L, and 3H3L. Subjects were informed of their own cognitive type and, depending on the treatment, that of the others in their market. We found that heterogeneous markets (3H3L) generated significantly larger mispricing than homogeneous markets (6H or 6L) regardless of whether subjects were informed about the cognitive type of others in their market. Thus, diversity of cognitive ability among market participants increased mispricing. However, common knowledge of heterogeneity or homogeneity in the market did not have a significant additional effect.

Keywords: Mispricing; Heterogeneity; Cognitive ability; Experimental asset markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-neu
Date: 2017-10-24
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