Trading by Professional Traders: An Experiment

52 Pages Posted: 14 Aug 2020

See all articles by Marco Cipriani

Marco Cipriani

Federal Reserve Bank of New York

Roberta De Filippis

University College London

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE)

Ryan Kendall

University College London - Department of Economics

Date Written: August 2020

Abstract

We examine how professional traders behave in two financial market experiments; we contrast professional traders’ behavior to that of undergraduate students, the typical experimental subject pool. In our first experiment, both sets of participants trade an asset over multiple periods after receiving private information about its value. Second, participants play the Guessing Game. Finally, they play a novel, individual-level version of the Guessing Game and we collect data on their cognitive abilities, risk preferences, and confidence levels. We find three differences between traders and students: Traders do not generate the price bubbles observed in previous studies with student subjects; traders aggregate private information better; and traders show higher levels of strategic sophistication in the Guessing Game. Rather than reflecting differences in cognitive abilities or other individual characteristics, these results point to the impact of traders’ on-the-job learning and traders’ beliefs about their peers’ strategic sophistication.

Keywords: bubbles, experiments, financial markets, information aggregation, professional traders, strategic sophistication

JEL Classification: C93, G11, G14

Suggested Citation

Cipriani, Marco and De Filippis, Roberta and Guarino, Antonio and Kendall, Ryan, Trading by Professional Traders: An Experiment (August 2020). FRB of New York Staff Report No. 939, Available at SSRN: https://ssrn.com/abstract=3672641 or http://dx.doi.org/10.2139/ssrn.3672641

Marco Cipriani (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Roberta De Filippis

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE) ( email )

Gower Street
London WC1E 6BT
United Kingdom

HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/

Ryan Kendall

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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