Emotions and Chat in a Financial Markets Experiment
30 Pages Posted: 13 Mar 2011
Date Written: March 11, 2011
This paper examines experimentally two common conjectures in the popular literature on financial markets: that they are swayed by emotion and that they behave like a 'crowd'. We find consistent evidence that deviations of prices from fundamental value depend on the emotion of excitement and on the presence of independently identified 'irrational' traders. Other than through 'irrational' traders, there is no evidence, however, that non-price communication ('chat') influences prices. Subjects with an economics background make better traders.
Keywords: asset bubbles, cheap talk, emotions, noise traders, behavioral finance
JEL Classification: C91, G12
Suggested Citation: Suggested Citation