Irrational Trading in a Financial Market

36 Pages Posted: 9 Mar 1999

See all articles by Ben Jacobsen

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Abstract

A basic assumption in economics is that agents prefer more to less. We find that in an experimental financial market--a large scale political stock market--more than 50 percent of the traders act irrationally in the sense that they violate this fundamental assumption frequently (at least 10 percent of the time). However, the impact of this irrationality seems small, since related losses consist of less than 1 percent of total investments in this market and we find no effect on prices. We do however find systematic bias in prices: Our evidence shows that the sum of the bid prices of all traded stocks exceeds the fundamental value of the market about 10 percent of the time. We argue that another type of irrationality known as 'loss aversion' causes this upward bias.

JEL Classification: G1, D4

Suggested Citation

Jacobsen, Ben, Irrational Trading in a Financial Market. Available at SSRN: https://ssrn.com/abstract=150629 or http://dx.doi.org/10.2139/ssrn.150629

Ben Jacobsen (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Massey University ( email )

Auckland
New Zealand

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