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The Effect of Financial Selection in Experimental Asset Markets

Dmitry Gladyrev (), Owen Powell () and Natalia Shestakova ()
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Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: The market selection hypothesis posits that over time more successful traders will stay in the market, whereas those with trading losses will exit. If success is at least somewhat determined by behavior, then as a result of market selection traders who survive in markets behave differently than traders who are randomly drawn from the population to participate in markets. This effect has so far been ignored in the literature, therefore we design and carry out an experiment to study the effects of market selection on market outcomes. We find that markets populated by more extreme earners exhibit stronger mispricing, and that this is strongly related to the fact that more extreme earners experience higher bubbles in the past. This suggests that experience may not decrease bubbles in real markets as much as was previously thought. Furthermore, we find evidence of relationships between earnings, trading activity, portfolio risk and transaction risk. Mistakes are also associated with more extreme earnings, however this disappears over time.

JEL-codes: G02 C92 D4 D53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
Date: 2014-08
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