The Complementarity of Experimental and Archival Finance Research

Abstract

A large literature in finance indicates that real people are not fully rational decision makers who optimize using all available information, as is often assumed in traditional models. A variety of empirical approaches have been adopted to examine financial decision making, including experimental and archival methods. We provide side-by-side comparisons of research studies that use archival and experimental methods to examine important behavioral finance topics such as the disposition effect, CEO overconfidence, post-earnings announcement drift in stock returns (PEAD), and investor attention. In addition, we contrast the application of archival and experimental methods for a traditional finance topic by discussing a pair of market microstructure studies. The side-by-side examples give the reader a sense of the complementarities between the contributions provided by research using different empirical methods in different research paradigms.

Keywords: Behavioral finance, experimental finance, disposition effect, overconfidence, post earnings announcement drift

JEL Classification: C92, G1