Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets

Abstract

One explanation for overpricing on asset markets is a lack of traders’ self-control. Selfcontrol is the individual capacity to override or inhibit undesired impulses that may drive prices. We implement the first experiment to address the causal relationship between selfcontrol abilities and systematic overpricing on financial markets. Our setup can detect some of the channels through which individual self-control restrictions could transmit into irrational exuberance in markets. Our data indicate a large direct effect of restricted self-control abilities on market overpricing. Low self-control traders report stronger emotions after the market.

Keywords: behavioral finance, trader behavior, self control, experimental asset markets

JEL Classification: G02, G11, G12, D53, D84