Trading Fast and Slow the Role of Deliberation in Experimental Financial Markets

Center for Relationship Banking and Economics (CERBE) Working Paper Series No. 7

25 Pages Posted: 27 Mar 2017

See all articles by Giovanni Ferri

Giovanni Ferri

LUMSA University

Matteo Ploner

University of Trento

Matteo Rizzolli

LUMSA University

Date Written: March 29, 2016

Abstract

Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long tested both the determinants of the formation of financial bubbles and institutional designs meant at solving such bubbles. We explore whether the dual process theory proposed by Kahneman (2011) can explain bubbles’ formation. As compared with our benchmark FAST treatment, we deliberately slow down the decision making process in our SLOW treatment, and thus we induce more System- 2 type reasoning. We show that high volatility and extreme realizations are greatly reduced and average prices remain consistently aligned with the expected fundamental value once risk-aversion is considered. We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment. We also show that the SLOW condition clears out the hot-hand fallacy. Finally, we derive some tentative policy implications concerning slowing down finance.

Keywords: Rational vs Emotional Choice, Slow vs Fast Trading, Dual Process Theory, System-1 and System-2, Speculative Bubbles, Behavioral Finance

JEL Classification: C91, G02, G12

Suggested Citation

Ferri, Giovanni and Ploner, Matteo and Rizzolli, Matteo, Trading Fast and Slow the Role of Deliberation in Experimental Financial Markets (March 29, 2016). Center for Relationship Banking and Economics (CERBE) Working Paper Series No. 7. Available at SSRN: https://ssrn.com/abstract=2931537 or http://dx.doi.org/10.2139/ssrn.2931537

Giovanni Ferri (Contact Author)

LUMSA University ( email )

Via della Traspontina
Roma, Rome 00192
Italy

HOME PAGE: http://www.lumsa.it/giovanni-ferri

Matteo Ploner

University of Trento ( email )

Via Giuseppe Verdi 26
Trento, Trento 38152
Italy

Matteo Rizzolli

LUMSA University ( email )

Via Pompeo Magno
Roma, Rome 00191
Italy

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