Behavior and asset markets: Individual decisions, emotions and fundamental value trajectories

This thesis consists of four chapters related to individual- and market- level behavior in experimental financial markets. The first three chapters analyze asset pricing and, in particular, stylized facts such as bubbles and crashes, as well as some of the factors that influence such phenomena. In particular, the first chapter focuses on the effect of the fundamental value time trajectory of an asset, as well as the role of individual traders’ characteristics on aggregate market behavior. The second and third chapters analyze the role of emotions in asset pricing and individual trading decisions. By measuring traders’ emotions in real time with facereading software, it is possible to link emotional responses to market activity.
The fourth chapter of this thesis is focused on behavioral biases in mutual fund investment, where under certain combinations of expected return and risk, suboptimal asset allocation is observed. This chapter also evaluates the effect that the structure of the information provided has on an investor’s behavior and consequently, on the demand for funds.