Hostname: page-component-7479d7b7d-k7p5g Total loading time: 0 Render date: 2024-07-11T22:48:25.520Z Has data issue: false hasContentIssue false

Heterogeneity of Beliefs and Trading Behavior: A Reexamination

Published online by Cambridge University Press:  14 February 2023

Sascha Füllbrunn
Affiliation:
Radboud University, Department of Economics and Business Economics sascha.fullbrunn@ru.nl
Christoph Huber*
Affiliation:
WU Vienna University of Economics and Business, Institute for Markets and Strategy
Catherine Eckel
Affiliation:
Texas A&M University, Department of Economics ceckel@tamu.edu
Utz Weitzel
Affiliation:
Radboud University, Department of Economics and Business Economics and Vrije Universiteit Amsterdam, Department of Finance and Vrije Universiteit Amsterdam, Department of Finance u.weitzel@vu.nl
*
christoph.huber@wu.ac.at (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Combining experimental data sets from seven individual studies, including 255 asset markets with 2,031 participants, and 36,326 short-term price forecasts, we analyze the role of heterogeneity of beliefs in the organization of trading behavior by reproducing and reconsidering earlier experimental findings. Our results confirm prior evidence that price expectations affect trading behavior. However, heterogeneity in beliefs does not seem to drive overpricing and asset market bubbles, as suggested by earlier studies, and we find no indication of short-term beliefs being better determinants of trading behavior than longer-term beliefs.

Type
Research Article
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous reviewer and Jarrad Harford (the editor) as well as conference participants at 2022 Experimental Finance and the 2022 Behavioral Macroeconomics Workshop for helpful comments and suggestions. We also thank Tim Carlé and Tibor Neugebauer for clarifying details about their original analyses as well as Eric Guerci and Michelle Song for making the full data sets from Holt, Porzio, and Song (2017) and Duchêne, Guerci, Hanaki, and Noussair (2019) available. CRediT author statement: Conceptualization and Methodology: S.F., C.H., U.W.; Data curation, formal analysis, investigation, visualization, validation, and writing original draft: S.F., C.H.; Writing – review and editing: all authors. All errors are our own.

References

Aldrich, E. M., andVargas, K. L.. “Experiments in High-Frequency Trading: Comparing Two Market Institutions.”Experimental Economics,23 (2020),322352.CrossRefGoogle Scholar
Anderson, E. W.;Ghysels, E.; andJuergens, J. L.. “Do Heterogeneous Beliefs Matter for Asset Pricing?Review of Financial Studies,18 (2005),875924.CrossRefGoogle Scholar
Basak, S.Asset Pricing with Heterogeneous Beliefs.”Journal of Banking & Finance,29 (2005),28492881.CrossRefGoogle Scholar
Bloomfield, R., andAnderson, A.. “Experimental Finance.” InBehavioral Finance: Investors, Corporations, and Markets,Baker, H. K., andNofsinger, J. R., eds.New York:Wiley (2010), pp.113130.CrossRefGoogle Scholar
Bosch-Rosa, C., andCorgnet, B.. “Cognitive Finance.” InHandbook of Experimental Finance,Füllbrunn, S. andHaruvy, E., eds.Cheltenham, UK:Edward Elgar Publishing (2022).Google Scholar
Buraschi, A., andJiltsov, A.. “Model Uncertainty and Option Markets with Heterogeneous Beliefs.”Journal of Finance,61 (2006),28412897.CrossRefGoogle Scholar
Button, K. S.;Ioannidis, J.;Mokrysz, C.;Nosek, B. A.;Flint, J.;Robinson, E. S.; andMunafò, M. R.. “Power Failure: Why Small Sample Size Undermines the Reliability of Neuroscience.”Nature Reviews Neuroscience,14 (2013),365376.CrossRefGoogle ScholarPubMed
Caginalp, G.;Porter, D.; andSmith, V. L.. “Initial Cash/Asset Ratio and Asset Prices: An Experimental Study.”Proceedings of the National Academy of Sciences,95 (1998),756761.CrossRefGoogle ScholarPubMed
Camerer, C. F.;Dreber, A.;Forsell, E.;Ho, T.-H.;Huber, J.;Johannesson, M.;Kirchler, M.;Almenberg, J.;Altmejd, A.;Chan, T.;Heikensten, E.;Holzmeister, F.;Imai, T.;Isaksson, S.;Nave, G.;Pfeiffer, T.;Razen, M.; andWu., H.Evaluating Replicability of Laboratory Experiments in Economics.”Science,351 (2016),14331436.CrossRefGoogle ScholarPubMed
Camerer, C. F.;Dreber, A.; andJohannesson, M.. “Replication and Other Practices for Improving Scientific Quality in Experimental Economics.” InHandbook of Research Methods and Applications in Experimental Economics,Schram, A. andUle, A., eds.Cheltenham, UK:Edward Elgar Publishing (2019).Google Scholar
Carlé, T. A.;Lahav, Y.;Neugebauer, T.; andNoussair, C. N.. “Heterogeneity of Beliefs and Trade in Experimental Asset Markets.”Journal of Financial and Quantitative Analysis,54 (2019),215245.CrossRefGoogle Scholar
Cason, T. N., andFriedman, D.. “Price Formation in Double Auction Markets.”Journal of Economic Dynamics and Control,20 (1996),13071337.CrossRefGoogle Scholar
Chen, R.;Chen, Y.; andRiyanto, Y. E.. “Best Practices in Replication: A Case Study of Common Information in Coordination Games.”Experimental Economics,24 (2021),230.CrossRefGoogle Scholar
Christensen, G., andMiguel, E.. “Transparency, Reproducibility, and the Credibility of Economics Research.”Journal of Economic Literature,56 (2018),920980.CrossRefGoogle Scholar
Corgnet, B.;Deck, C.;DeSantis, M.;Hampton, K.; andKimbrough, E. O.. “When Do Security Markets Aggregate Dispersed Information?Management Science, forthcoming (2023).CrossRefGoogle Scholar
Detemple, J., andMurthy, S.. “Intertemporal Asset Pricing with Heterogeneous Beliefs.”Journal of Economic Theory,62 (1994),294320.CrossRefGoogle Scholar
Doukas, J. A.;Kim, C. F.; andPantzalis, C.. “Divergence of Opinion and Equity Returns.”Journal of Financial and Quantitative Analysis,41 (2006),573606.CrossRefGoogle Scholar
Duchêne, S.;Guerci, E.;Hanaki, N.; andNoussair, C. N.. “The Effect of Short Selling and Borrowing on Market Prices and Traders’ Behavior.”Journal of Economic Dynamics and Control,107 (2019),103734.CrossRefGoogle Scholar
Eckel, C. C., andFüllbrunn, S. C.. “Thar She Blows? Gender, Competition, and Bubbles in Experimental Asset Markets.”American Economic Review,105 (2015),906920.CrossRefGoogle Scholar
Eckel, C. C., andFüllbrunn, S. C.. “Hidden vs. Known Gender Effects in Experimental Asset Markets.”Economics Letters,156 (2017),79.CrossRefGoogle Scholar
Fellner, G., andTheissen, E.. “Short Sale Constraints, Divergence of Opinion and Asset Prices: Evidence from the Laboratory.”Journal of Economic Behavior & Organization,101 (2014),113127.CrossRefGoogle Scholar
Friedman, D.How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence.”Economic Inquiry,31 (1993),410435.CrossRefGoogle Scholar
Füllbrunn, S.;Rau, H. A.; andWeitzel, U.. “Does Ambiguity Aversion Survive in Experimental Asset Markets?Journal of Economic Behavior & Organization,107 (2014),810826.CrossRefGoogle Scholar
Giglio, S.;Maggiori, M.;Stroebel, J.; andUtkus, S.. “Five Facts About Beliefs and Portfolios.”American Economic Review,111 (2021),14811522.CrossRefGoogle Scholar
Goeree, J. K., andHommes, C. H.. “Heterogeneous Beliefs and the Non-Linear Cobweb Model.”Journal of Economic Dynamics and Control,24 (2000),761798.CrossRefGoogle Scholar
Hanaki, N.;Akiyama, E.; andIshikawa, R.. “Effects of Different Ways of Incentivizing Price Forecasts on Market Dynamics and Individual Decisions in Asset Market Experiments.”Journal of Economic Dynamics and Control,88 (2018),5169.CrossRefGoogle Scholar
Harrison, J. M., andKreps, D. M.. “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations.”Quarterly Journal of Economics,92 (1978),323336.CrossRefGoogle Scholar
Haruvy, E.;Lahav, Y.; andNoussair, C. N.. “Traders’ Expectations in Asset Markets: Experimental Evidence.”American Economic Review,97 (2007),19011920.CrossRefGoogle Scholar
Harvey, C. R.Editorial: Replication in Financial Economics.”Critical Finance Review,8 (2019),19.CrossRefGoogle Scholar
Hirshleifer, J.Speculation and Equilibrium: Information, Risk, and Markets.”Quarterly Journal of Economics,89 (1975),519542.CrossRefGoogle Scholar
Holt, C. A.;Porzio, M.; andSong, M. Y.. “Price Bubbles, Gender, and Expectations in Experimental Asset Markets.”European Economic Review,100 (2017),7294.CrossRefGoogle Scholar
Hong, H., andStein, J. C.. “Disagreement and the Stock Market.”Journal of Economic Perspectives,21 (2007),109128.CrossRefGoogle Scholar
Huber, C.;Bindra, P. C.; andKleinlercher, D.. “Design-Features of Bubble-Prone Experimental Asset Markets with a Constant FV.”Journal of the Economic Science Association,5 (2019),197209.CrossRefGoogle ScholarPubMed
Ioannidis, J. P. A.Why Most Published Research Findings Are False.”PLoS Medicine,2 (2005),e1004085.CrossRefGoogle ScholarPubMed
Ioannidis, J. P. A.;Stanley, T. D.; andDoucouliagos, H.. “The Power of Bias in Economics Research.”Economic Journal,127 (2017),F236F265.CrossRefGoogle Scholar
Jouini, E., andNapp, C.. “Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs.”Review of Economic Studies,74 (2007),11491174.CrossRefGoogle Scholar
Kirchler, M.;Huber, J.; andStöckl, T.. “Thar She Bursts: Reducing Confusion Reduces Bubbles.”American Economic Review,102 (2012),865883.CrossRefGoogle Scholar
Kleinlercher, D., andStöckl, T.. “Thou Shalt Not Trade—An Analysis of the Violations of no-Trade Predictions in Experimental Asset Markets.”Journal of Behavioral and Experimental Finance,32 (2021),100590.CrossRefGoogle Scholar
Kogan, S.;Kwasnica, A. M.; andWeber, R. A.. “Coordination in the Presence of Asset Markets.”American Economic Review,101 (2011),927947.CrossRefGoogle Scholar
McCabe, K. A.;Rassenti, S. J.; andSmith, V. L.. “Designing Call Auction Institutions: Is Double Dutch the Best?Economic Journal,102 (1992),923.CrossRefGoogle Scholar
Meeuwis, M.;Parker, J. A.;Schoar, A.; andSimester, D.. “Belief Disagreement and Portfolio Choice.”Journal of Finance,77 (2022),3913247.Google Scholar
Milgrom, P., andStokey, N.. “Information, Trade and Common Knowledge.”Journal of Economic Theory,26 (1982),1727.CrossRefGoogle Scholar
Miller, E. M.Risk, Uncertainty, and Divergence of Opinion.”Journal of Finance,32 (1977),11511168.CrossRefGoogle Scholar
Nosek, B. A.;Alter, G.;Banks, G. C.;Borsboom, D.;Bowman, S. D.;Breckler, S. J.;Buck, S.;Chambers, C. D.;Chin, G.;Christensen, G.;Contestabile, M.;Dafoe, A.;Eich, E.;Freese, J.;Glennerster, R.;Goroff, D.;Green, D. P.;Hesse, B.;Humphreys, M.;Ishiyama, J.;Karlan, D.;Kraut, A.;Lupia, A.;Mabry, P.;Madon, T.;Malhotra, N.;Mayo-Wilson, E.;McNutt, M.;Miguel, E.;Paluck, E. L.;Simonsohn, U.;Soderberg, C.;Spellman, B. A.;Turitto, J.;VandenBos, G.;Vazire, S.;Wagenmakers, E. J.;Wilson, R.; andYarkoni, T.. “Promoting an Open Research Culture.”Science,348 (2015),14221425.CrossRefGoogle ScholarPubMed
Nosek, B. A., andErrington, T. M.. “What Is Replication?PLoS Biology,18 (2020),e3000691.CrossRefGoogle ScholarPubMed
Noussair, C.;Robin, S.; andRuffieux, B.. “Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values.”Experimental Economics,4 (2001),87105.CrossRefGoogle Scholar
Open Science Collaboration. “Estimating the Reproducibility of Psychological Science.”Science,349 (2015),aac4716.CrossRefGoogle Scholar
Page, L., andSiemroth, C.. “How Much Information Is Incorporated into Financial Asset Prices? Experimental Evidence.”Review of Financial Studies,34 (2021),44124449.CrossRefGoogle Scholar
Palan, S.A Review of Bubbles and Crashes in Experimental Asset Markets.”Journal of Economic Surveys,27 (2013),570588.CrossRefGoogle Scholar
Plott, C. R., andSunder, S.. “Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets.”Econometrica,56 (1988),10851118.CrossRefGoogle Scholar
Popper, K. R.The Logic of Scientific Discovery.London, UK:Routledge (1959).Google Scholar
Powell, O., andShestakova, N.. “Experimental Asset Markets: A Survey of Recent Developments.”Journal of Behavioral and Experimental Finance,12 (2016),1422.CrossRefGoogle Scholar
Scheinkman, J. A., andXiong, W.. “Overconfidence and Speculative Bubbles.”Journal of Political Economy,111 (2003),11831220.CrossRefGoogle Scholar
Schmidt, S.Shall We Really Do It Again? The Powerful Concept of Replication Is Neglected in the Social Sciences.”Review of General Psychology,13 (2009),90100.CrossRefGoogle Scholar
Schnitzlein, C. R.Call and Continuous Trading Mechanisms Under Asymmetric Information: An Experimental Investigation.”Journal of Finance,51 (1996),613636.CrossRefGoogle Scholar
Smith, V. L.An Experimental Study of Competitive Market Behavior.”Journal of Political Economy,70 (1962),111137.CrossRefGoogle Scholar
Smith, V. L.;Boening, M. V.; andWellford, C. P.. “Dividend Timing and Behavior in Laboratory Asset Markets.”Economic Theory,16 (2000),567583.CrossRefGoogle Scholar
Smith, V. L.;Suchanek, G. L.; andWilliams, A. W.. “Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets.”Econometrica,56 (1988),11191151.CrossRefGoogle Scholar
Stöckl, T.;Huber, J.; andKirchler, M.. “Bubble Measures in Experimental Asset Markets.”Experimental Economics,13 (2010),284298.CrossRefGoogle Scholar
Theissen, E.Market Structure, Informational Efficiency and Liquidity: An Experimental Comparison of Auction and Dealer Markets.”Journal of Financial Markets,3 (2000),333363.CrossRefGoogle Scholar
Tirole, J.On the Possibility of Speculation Under Rational Expectations.”Econometrica,50 (1982),11631181.CrossRefGoogle Scholar
Van Boening, M. V.;Williams, A. W.; andLaMaster, S.. “Price Bubbles and Crashes in Experimental Call Markets.”Economics Letters,41 (1993),179185.CrossRefGoogle Scholar
Varian, H. R.Divergence of Opinion in Complete Markets: A Note.”Journal of Finance,40 (1985),309317.CrossRefGoogle Scholar
Verardo, M.Heterogeneous Beliefs and Momentum Profits.”Journal of Financial and Quantitative Analysis,44 (2009),795822.CrossRefGoogle Scholar
Weitzel, U.;Huber, C.;Huber, J.;Kirchler, M.;Lindner, F.; andRose, J.. “Bubbles and Financial Professionals.”Review of Financial Studies,33 (2020),26592696.CrossRefGoogle Scholar
Supplementary material: Link

Füllbrunn et al. Dataset https://osf.io/tpnq4
Link