Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment

A.G. Breaban, C.N. Noussair

Research output: Working paperDiscussion paperOther research output

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Abstract

Abstract: We report results from an asset market experiment, in which we investigate how the time path of the fundamental value trajectory affects the level of adherence to fundamentals. In contrast to previous experiments with long-lived assets, there is a phase in which fundamental values are constant before the onset of a trend. The trend is either increasing or decreasing, depending on the treatment. We compare the level of mispricing between the decreasing and increasing fundamental value trajectories. Before the market begins, risk aversion, loss aversion, and cognitive reflection protocols are administered to traders. We find evidence for closer adherence to fundamental values when the trajectory follows a decreasing, than when it has an increasing, trend. Greater average risk aversion on the part of traders in the market predicts lower market prices. The greater the level of loss aversion of the trader cohort, the lower the quantity traded. The greater the average cognitive reflection test score, the smaller the differences between market prices and fundamental values. The variation between groups in risk aversion, loss aversion, and CRT score, explains an additional 44% and 18% of the cohort-level variation in price level and mispricing, respectively, compared to a model including only treatment, experience level, and subject pool.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages34
Volume2014-010
Publication statusPublished - 2014

Publication series

NameCentER Discussion Paper
Volume2014-010

Fingerprint

Traders
Asset markets
Trajectory
Fundamental values
Market experiments
Loss aversion
Risk aversion
Adherence
Cohort
Mispricing
Market price
Market risk
Price level
Test scores
Experiment
Assets

Keywords

  • Bubble
  • Experiment
  • Risk Aversion
  • Loss Aversion
  • Cognitive Reflection

Cite this

Breaban, A. G., & Noussair, C. N. (2014). Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment. (CentER Discussion Paper; Vol. 2014-010). Tilburg: Economics.
Breaban, A.G. ; Noussair, C.N. / Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment. Tilburg : Economics, 2014. (CentER Discussion Paper).
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Breaban, AG & Noussair, CN 2014 'Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment' CentER Discussion Paper, vol. 2014-010, Economics, Tilburg.

Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment. / Breaban, A.G.; Noussair, C.N.

Tilburg : Economics, 2014. (CentER Discussion Paper; Vol. 2014-010).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment

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AU - Noussair, C.N.

N1 - Pagination: 34

PY - 2014

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N2 - Abstract: We report results from an asset market experiment, in which we investigate how the time path of the fundamental value trajectory affects the level of adherence to fundamentals. In contrast to previous experiments with long-lived assets, there is a phase in which fundamental values are constant before the onset of a trend. The trend is either increasing or decreasing, depending on the treatment. We compare the level of mispricing between the decreasing and increasing fundamental value trajectories. Before the market begins, risk aversion, loss aversion, and cognitive reflection protocols are administered to traders. We find evidence for closer adherence to fundamental values when the trajectory follows a decreasing, than when it has an increasing, trend. Greater average risk aversion on the part of traders in the market predicts lower market prices. The greater the level of loss aversion of the trader cohort, the lower the quantity traded. The greater the average cognitive reflection test score, the smaller the differences between market prices and fundamental values. The variation between groups in risk aversion, loss aversion, and CRT score, explains an additional 44% and 18% of the cohort-level variation in price level and mispricing, respectively, compared to a model including only treatment, experience level, and subject pool.

AB - Abstract: We report results from an asset market experiment, in which we investigate how the time path of the fundamental value trajectory affects the level of adherence to fundamentals. In contrast to previous experiments with long-lived assets, there is a phase in which fundamental values are constant before the onset of a trend. The trend is either increasing or decreasing, depending on the treatment. We compare the level of mispricing between the decreasing and increasing fundamental value trajectories. Before the market begins, risk aversion, loss aversion, and cognitive reflection protocols are administered to traders. We find evidence for closer adherence to fundamental values when the trajectory follows a decreasing, than when it has an increasing, trend. Greater average risk aversion on the part of traders in the market predicts lower market prices. The greater the level of loss aversion of the trader cohort, the lower the quantity traded. The greater the average cognitive reflection test score, the smaller the differences between market prices and fundamental values. The variation between groups in risk aversion, loss aversion, and CRT score, explains an additional 44% and 18% of the cohort-level variation in price level and mispricing, respectively, compared to a model including only treatment, experience level, and subject pool.

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KW - Loss Aversion

KW - Cognitive Reflection

M3 - Discussion paper

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Breaban AG, Noussair CN. Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment. Tilburg: Economics. 2014. (CentER Discussion Paper).