Naïve News Trading: Experimental Evidence
35 Pages Posted: 26 Apr 2018
Date Written: April 19, 2018
This study documents experimental evidence that naïve beliefs about the behavior of others contribute to excessive trading. The mechanism is based on the idea that when people process new information they naïvely neglect other market participants’ reaction to the information and consequently trade too much. In a series of laboratory experiments, I find that people actively trade on information that they should expect to be already incorporated into the price by other players. In line with naïve news trading, people underestimate the response of others to new information and consequently trade too much compared to the rational benchmark. A simple model with naïve investors who partially neglect that other investors respond to new information provides a good fit of the observed trading behavior.
Keywords: retail investors, excessive trading, news trading, bounded rationality
JEL Classification: G11, G40
Suggested Citation: Suggested Citation