Allying techniques from experimental economics and experimental psychology, we relate market data to independent measures of the psychological characteristics of the actors involved. This enables us to test hypotheses about the consequences of psychological variables for market behaviour.
Our experimental approach relies on an asymmetric information trading game directly inspired by Plott and Sunder (1988). The value of the asset can be high (490), medium (240), or low (50). The traders observe different private signals. For example when the value of the asset is high, half the participants are privately informed that it is not low, while the others learn privately that it not medium. Traders can place limit and market orders in a call auction and an open outcry continuous market. There is a strong winner’s curse risk in this trading game. For example, if an agent with a bullish signal (not 50) offered to buy, say at 270, this bid would systematically be hit by traders with bearish signals (not 490), while traders with neutral signals (not 240) would be much more reluctant to engage in trading. Biais and Pouget (1999) show that in equilibrium in this trading game there should be no trade, except at fully revealing prices, and consequently no trading gains or losses.
Recent theoretical research proposes that endogenous developments in financial markets can greatly amplify and propagate small income or interest rate shocks throughout the economy (Kiyotaki and Moore, 1997; and Bernanke, Gertler, and Gilchrist, 1996, 1999). Bernanke et al. (1996) call this amplification mechanism the 0financial accelerator1 or 0credit multiplier. The key idea behind the financial accelerator is the notion that shocks to the net worth of firms and households have a procyclical effect on their borrowing capacity.
This could happen either because the information cost wedge between external and internal finance moves countercyclically (Bernanke and Gertler, 1989), or because a procyclical change in the value of collateralizable assets changes the amount of collateralized external finance in the same direction (Kiyotaki and Moore, 1997). Following a positive income shock, agents should be able to raise more external finance and the increase in borrowing capacity would further boost investment spending. According to this view, financial mechanisms such as the endogenous procyclicality of external financing capacity can help explain important features of the business cycle and the transmission of monetary policy.
This book is for reference and informational purposes only and is no way intended as medical counseling or medical advice. The information contained herein should not be used to treat, diagnose, or prevent a disease or medical condition without the advice of a competent medical professional. This book deals with in-depth information on health, fitness, and nutrition. Most of the information applies to everyone in general; however, not everyone has the same body type. We each have different responses to exercise depending on our choice of intensity and diet.
