Do Investors Trade Too Much? A Laboratory Experiment

57 Pages Posted: 11 Dec 2015

See all articles by João da Gama Batista

João da Gama Batista

CentraleSupélec

Domenico Massaro

Catholic University of Milan; University of Amsterdam - CeNDEF

Jean-Philippe Bouchaud

Capital Fund Management

Damien Challet

CentraleSupélec; Encelade Capital SA

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Date Written: December 11, 2015

Abstract

We run experimental asset markets to investigate the emergence of excess trading and the occurrence of synchronised trading activity leading to crashes in the artificial markets. The market environment favours early investment in the risky asset and no posterior trading, i.e. a buy-and-hold strategy with a most probable return of over 600%. We observe that subjects trade too much, and due to the market impact that we explicitly implement, this is detrimental to their wealth. The asset market experiment was followed by risk aversion measurement. We find that preference for risk systematically leads to higher activity rates (and lower final wealth). We also measure subjects' expectations of future prices and find that their actions are fully consistent with their expectations. In particular, trading subjects try to beat the market and make profits by playing a buy low, sell high strategy. Finally, we have not detected any major market crash driven by collective panic modes, but rather a weaker but significant tendency of traders to synchronise their entry and exit points in the market.

Suggested Citation

da Gama Batista, João and Massaro, Domenico and Bouchaud, Jean-Philippe and Challet, Damien and Hommes, Cars H., Do Investors Trade Too Much? A Laboratory Experiment (December 11, 2015). Available at SSRN: https://ssrn.com/abstract=2702273 or http://dx.doi.org/10.2139/ssrn.2702273

João da Gama Batista

CentraleSupélec ( email )

Labo M.A.S
Grande Voie des Vignes
Châtenay-Malabry CEDEX, 92295
France

Domenico Massaro (Contact Author)

Catholic University of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Damien Challet

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Encelade Capital SA ( email )

Chemin du Bochet 8
Sulpice, 1025
Switzerland

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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