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Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets

Author

Listed:
  • Nobuyuki Hanaki

    (Université Côte d'Azur
    GREDEG-CNRS
    IUF)

  • Eizo Akiyama

    (University of Tsukuba, Japan)

  • Yukihiko Funaki

    (Waseda University, Japan)

  • Ryuichiro Ishikawa

    (University of Tsukuba, Japan)

Abstract
Does diversity of cognitive ability among market participants increase mispricing? Does common knowledge of heterogeneity in relation to cognitive ability of market participants further increase mispricing? We investigated these questions by measuring subjects' cognitive ability and categorizing those above median ability as type `H' and those below median ability as type `L'. We then constructed three market types, each containing six traders: 6H, 6L, and 3H3L. Subjects were informed of their own cognitive type and, depending on the treatment, that of the others in their market. We found that heterogeneous markets (3H3L) generated significantly larger mispricing than homogeneous markets (6H or 6L) regardless of whether subjects were informed about the cognitive type of others in their market. Thus, diversity of cognitive ability among market participants increased mispricing. However, common knowledge of heterogeneity or homogeneity in the market did not have a signi cant additional effect.

Suggested Citation

  • Nobuyuki Hanaki & Eizo Akiyama & Yukihiko Funaki & Ryuichiro Ishikawa, 2017. "Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets," GREDEG Working Papers 2017-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    • Handle: RePEc:gre:wpaper:2017-08
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    References listed on IDEAS

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    Cited by:

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    2. Tomoe Hoshihata & Ryuichiro Ishikawa & Nobuyuki Hanaki & Eizo Akiyama, 2017. "Flat Bubbles in Long-Horizon Experiments: Results from two Market Conditions," GREDEG Working Papers 2017-32, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    3. Bao, Te & Hommes, Cars, 2019. "When speculators meet suppliers: Positive versus negative feedback in experimental housing markets," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    4. Andreas Hefti & Steve Heinke & Frédéric Schneider, 2016. "Mental capabilities, trading styles, and asset market bubbles: theory and experiment," ECON - Working Papers 234, Department of Economics - University of Zurich.
    5. Hanaki, Nobuyuki & Akiyama, Eizo & Ishikawa, Ryuichiro, 2018. "Behavioral uncertainty and the dynamics of traders’ confidence in their price forecasts," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 121-136.
    6. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, Institute of Labor Economics (IZA).
    7. David L. Dickinson & Ananish Chaudhuri & Ryan Greenaway-McGrevy, 2020. "Trading while sleepy? Circadian mismatch and mispricing in a global experimental asset market," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 526-553, June.
    8. Marquardt, Philipp & Noussair, Charles N & Weber, Martin, 2019. "Rational expectations in an experimental asset market with shocks to market trends," European Economic Review, Elsevier, vol. 114(C), pages 116-140.
    9. Kiss, Hubert J. & Kóczy, László Á. & Pintér, Ágnes & Sziklai, Balázs R., 2022. "Does risk sorting explain overpricing in experimental asset markets?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 99(C).

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    More about this item

    Keywords

    Cognitive ability; Heterogeneity; Mispricing; Experimental asset markets;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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