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What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance 

10/3/2016

 
Here.

Using simulations and experiments, we pinpoint two main drivers of trader performance: cognitive reflection and theory of mind. Both dimensions facilitate traders’ learning about asset valuation. Cognitive reflection helps traders use market signals to update their beliefs whereas theory of mind offers traders crucial hints on the quality of those signals. We show these skills to be complementary because traders benefit from understanding the quality of market signals only if they are capable of processing them. Cognitive reflection relates to previous Behavioral Finance research as it is the best predictor of a trader’s ability to avoid commonly-observed behavioral biases.


We recruited a total of 204 participants from a subject pool of more than 1,500 students at a major Western US University. We conducted a total of 17 sessions, each with 12 traders. In the ten baseline sessions, traders were endowed with 1,200 francs in cash and 4 shares. To ensure our results are not artifacts of this specific endowment structure, two sessions were run using the PS approach of endowing each subject with a 25,000 franc loan that had to be repaid at the end of each period and 4 shares. We added a third treatment to assess the robustness of our findings 3 We leave the study of information aggregation at the market level to Corgnet, DeSantis and Porter (2015a), which includes a detailed analysis of this topic. 10 to higher stakes by doubling both the traders’ initial cash endowment (to 2,400 francs) as well as the value of shares (to 100, 480 and 980). 4 Before each session started subjects completed a 10-minute training quiz regarding the probability of occurrence of each possible asset value (50, 240 or 490 francs) at the end of each of the 17 markets. 


From:

Brice Corgnet
University of L:yon

Mark DeSantis 
David Porter
Chapman University



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