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The Effect of Financial Selection in Experimental Asset Markets

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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.

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  • Dmitry Gladyrev & Owen Powell & Natalia Shestakova, 2014. "The Effect of Financial Selection in Experimental Asset Markets," Vienna Economics Papers vie1404, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1404
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    References listed on IDEAS

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    Cited by:

    1. Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.

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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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