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
Date Written: March 29, 2016
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 We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment.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: Suggested Citation