Another Law of Small Numbers: Patterns of Trading Prices in Experimental Markets

31 Pages Posted: 7 Jun 2017 Last revised: 12 Oct 2017

See all articles by Tristan Roger

Tristan Roger

Université Paris-Dauphine, PSL Research University

Wael Bousselmi

Université Montpellier I

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School

Marc Willinger

LAMETA, University of Montpellier 1

Date Written: October 12, 2017

Abstract

Studies in neuropsychology show that the human brain processes small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we report the results of an experiment showing that trading prices on experimental markets are processed differently by participants, depending on their magnitude. Deviations from fundamental values are larger in small price markets than in large price markets. Our experimental design allows us to confirm the result at the individual level. For a given participant, the deviation from the fundamental value is 27.27% on average when she trades on a small price market compared to about 0% on a large price market. Our results show that price magnitude influences the way people perceive the distribution of future returns. This result is at odds with standard finance theory but is consistent with: (1) a number of observations in the empirical finance and accounting literature; and, (2) the use of different mental scales for small and large prices.

Keywords: Experimental markets, number perception, behavioral bias, stock price magnitude, mental scales

Suggested Citation

Roger, Tristan and Bousselmi, Wael and Roger, Patrick and Willinger, Marc, Another Law of Small Numbers: Patterns of Trading Prices in Experimental Markets (October 12, 2017). Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2981343 or http://dx.doi.org/10.2139/ssrn.2981343

Tristan Roger (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Wael Bousselmi

Université Montpellier I ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
Montpellier, Cedex 2 34090
France

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School ( email )

PEGE
61 avenue de la Forêt Noire
Strasbourg, 67000
France

Marc Willinger

LAMETA, University of Montpellier 1 ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
34006 Montpellier Cedex 1, Cedex 2 34090
France

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