Taming the Bias Zoo

Abstract

The success of the behavioral economics literature has led to a new challenge—a large number of behavioral biases offering observationally similar predictions for a targeted anomaly in financial markets. To tame the bias zoo, we propose a new approach of combining subjective survey responses with observational data; this approach has the advantage of being robust to question-specific biases introduced through surveys. We illustrate this approach by administering a nationwide survey of Chinese retail investors to elicit their trading motives. In cross-sectional regressions of respondents’ actual turnover on survey-based measures of trading motives, perceived information advantage and gambling preference dominate other motives, even though they are not the most prevalent biases simply based on survey responses.