Mental capabilities, trading behaviour, and asset bubbles : theory and experiments

Hefti, Andreas; Heinke, Steve; Schneider, Frederic

doi:10.5167/uzh-125847

Publication type:	Working paper – expertise – study
Title:	Mental capabilities, trading behaviour, and asset bubbles : theory and experiments
Authors:	Hefti, Andreas Heinke, Steve Schneider, Frederic
DOI:	10.5167/uzh-125847
Extent:	47
Issue Date:	2016
Series:	Working paper series / Department of Economics
Series volume:	234
Publisher / Ed. Institution:	Universität Zürich
Publisher / Ed. Institution:	Zürich
ISSN:	1664-7041
Language:	English
Subjects:	Asset market; Heterogeneity; Mental capability
Subject (DDC):	332.6: Investment
Abstract:	Speculative behavior on markets is still poorly understood in economics. While it is a consensus that heterogeneous expectations and thus different trading patterns are necessary for a bubble to occur, economists have no clear answer for the sources of this heterogeneity. We attempt to model heterogeneous individual expectations formation as the result of a combinations of analytical and instinctive capacities. Analytical skill refers to the ability to solve cognitively complex problems. Instinct refers to the psychological propensity to put oneself into the shoes of others. A key strength of our proposal lies in the combination of theoretical and empirical expertise. We intend to work on a fine-tuned theory of how these skills can bias individuals' expectations, and how these heterogeneous expectations in turn determine trading patterns. We show that the two-dimensional skill measure is both necessary and sufficient to explain commonly observed trading patterns, and the resulting emergence of experimental asset market bubbles. In the empirical part of our project, we rigorously test our model in a series of experiments, where we independently measure subjects' skill levels in a screening phase, and their trading behavior in a standard laboratory asset market. Data from pilot sessions confirm crucial tenets of our model, in particular the relation between skill types and distinct trading patterns. The novel experimental design also allows us to test a number of different theoretical predictions by exogenously varying the treatment. In a final application, we take our experimental skill measure to the field and assess the generalizability of our laboratory results. While this project focuses on a deeper understanding of trading dynamics in the asset market, we feel confident that our general framework of heterogeneous mental representations is a promising tool to investigate behavior in other strategic environments as well.
URI:	http://www.econ.uzh.ch/static/wp/econwp234.pdf https://digitalcollection.zhaw.ch/handle/11475/16339
License (according to publishing contract):	Licence according to publishing contract
Departement:	School of Management and Law
Organisational Unit:	Center for Labor, Digital and Regional Economics (CLDR)
Appears in collections:	Publikationen School of Management and Law

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Hefti, A., Heinke, S., & Schneider, F. (2016). Mental capabilities, trading behaviour, and asset bubbles : theory and experiments. Universität Zürich. https://doi.org/10.5167/uzh-125847

Hefti, A., Heinke, S. and Schneider, F. (2016) Mental capabilities, trading behaviour, and asset bubbles : theory and experiments. Zürich: Universität Zürich. Available at: https://doi.org/10.5167/uzh-125847.

A. Hefti, S. Heinke, and F. Schneider, “Mental capabilities, trading behaviour, and asset bubbles : theory and experiments,” Universität Zürich, Zürich, 2016. doi: 10.5167/uzh-125847.

HEFTI, Andreas, Steve HEINKE und Frederic SCHNEIDER, 2016. Mental capabilities, trading behaviour, and asset bubbles : theory and experiments [online]. Zürich: Universität Zürich. Verfügbar unter: http://www.econ.uzh.ch/static/wp/econwp234.pdf

Hefti, Andreas, Steve Heinke, and Frederic Schneider. 2016. “Mental Capabilities, Trading Behaviour, and Asset Bubbles : Theory and Experiments.” Zürich: Universität Zürich. https://doi.org/10.5167/uzh-125847.

Hefti, Andreas, et al. Mental Capabilities, Trading Behaviour, and Asset Bubbles : Theory and Experiments. Universität Zürich, 2016, https://doi.org/10.5167/uzh-125847.