Risk Attitude, Beliefs Updating and the Information Content of Trades

Bisière, Christophe, Décamps, Jean-Paul and Lovo, Stefano (2015) Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment. Management Science, vol. 61 (n° 6). pp. 1378-1397.

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Official URL: http://tse-fr.eu/pub/27770


We conduct a series of experiments that simulate trading in financial markets. We find that the information content of the order flow varies with the strength of subjects' prior beliefs about fundamentals. The presence of intrinsic uncertainty about the asset's fundamentals reduces informational efficiency. This originates from subjects' risk attitudes and biases in the way some subjects update their beliefs. The behavior of approximately 63% of the subjects is consistent with the expected utility maximization. These subjects are either risk averse (52%) or risk loving (11%). About 22% of the subjects display non-Bayesian updating of beliefs: underconfidence emerges for weak prior beliefs, and confirmation bias occurs for strong prior beliefs. Non-Bayesian belief updating reduces market efficiency when subjects' prior beliefs are weak and increases it when the prior beliefs are strong.

Item Type: Article
Sub-title: An Experiment
Language: English
Date: June 2015
Refereed: Yes
Uncontrolled Keywords: behavior under uncertainty, risk attitude, belief updating, financial market efficiency, laboratory experiment
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:42
Last Modified: 04 Apr 2019 05:48
OAI ID: oai:tse-fr.eu:27770
URI: http://publications.ut-capitole.fr/id/eprint/16490

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