Limited Cognition and Clustered Asset Prices: Evidence from Betting Markets

Alasdair Brown and Fuyu Yang
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Alasdair Brown: University of East Anglia

No 54, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: Asset prices tend to cluster at round numbers. We examine betting exchange data on U.K. horse races to establish whether limited cognition is partially responsible for this clustering. The key tool in this study is the stark increase in cognitive load faced by traders during races compared to prior to races. Using an approach that is part regression discontinuity and part difference-in-difference, we find that traders exhibit a substantially higher propensity to quote round numbers during races. This result is robust to a series of placebo tests, and also to the use of bounds to deal with missing data.

Date: 2013-12
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Journal Article: Limited cognition and clustered asset prices: Evidence from betting markets (2016)
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