Risk Attitude, Beliefs Updating, and the Information Content of Trades: An Experiment

Christophe Bisière (1) , Jean-Paul Décamps (2, 1) , Stefano Lovo (3)

1 TSM - Toulouse School of Management Research
2 LBNC - Laboratoire Biens, Normes, Contrats
3 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

We conduct a series of experiments that simulate trading in financial markets. We find that the information content of the order flow varies with the strength of subjects' prior beliefs about fundamentals. The presence of intrinsic uncertainty about the asset's fundamentals reduces informational efficiency. This originates from subjects' risk attitudes and biases in the way some subjects update their beliefs. The behavior of approximately 63% of the subjects is consistent with the expected utility maximization. These subjects are either risk averse (52%) or risk loving (11%). About 22% of the subjects display non-Bayesian updating of beliefs: underconfidence emerges for weak prior beliefs, and confirmation bias occurs for strong prior beliefs. Non-Bayesian belief updating reduces market efficiency when subjects' prior beliefs are weak and increases it when the prior beliefs are strong.

Mots clés: behavior under uncertainty; risk attitude; belief updating; financial market efficiency; laboratory experiment

Domaines: Gestion et management

Christophe Bisière, Jean-Paul Décamps, Stefano Lovo. Risk Attitude, Beliefs Updating, and the Information Content of Trades: An Experiment. Management Science, 2015, 61 (6), pp.1378 - 1397. ⟨10.1287/mnsc.2013.1886⟩. ⟨halshs-01400243⟩