Individual Investors Trading Strategies and Responsiveness to Information – A Virtual Stock Market Internet Experiment

Theoretical research as well as empirical evidence offer mixed results regarding individual investor trading strategies and motives behind them. Are investors trading on information or are they simply trying to predict prices based on fads and/or behavioral biases? If investors follow certain patterns, what are those – trend-chasing or contrarian? Do investors watch closely news related to stocks in their portfolios and respond to them accordingly or perhaps they focus on market-wide macroeconomic information? This experiment aims to investigate links between public information and short-term investment behavior at the individual decision-making level. As these issues are of particular importance in financial markets, we have designed a virtual stock market experiment to investigate the relevant decision processes directly. Whereas there are numerous extant studies that use aggregate market data, in a controlled experiment we were able to gather detailed data on individual trading strategies – this was the main motivation behind our project. The other driving force behind our experiment was the need to advance our understanding behind the very motives for trading by individuals, particularly concerning the utilization and responsiveness to information. We feel conducting such an experiment was necessary to directly examine the relationship between trading behavior and information – we used real-world real-time information gathered on the Internet and real stocks with real prices, albeit in a virtual stock market environment. Our field experiment may thus be considered to be a fact finding investigation into the short-term behavioral patterns and trading motives of individual investors. We focus on individual investors’ trading strategies and their relation to public information – about prices, macroeconomic news, and relevant individual-stock information. Our principal goals are to address the following issues: 1. Do investors actually take into account contemporaneous public information when making their trading decisions? • Does the amount of information influence frequency of trading? • Do investors adhere to distinctive trading patterns, i.e. do they use positive feedback or negative feedback strategies? 2. What are the reasons behind specific trading decisions and decisions not to trade? • What kind of strategies are utilized most frequently and are they based on fundamental or behavioral motives? • To what extent do investors employ “wait and see” hold strategies and why? 3. Are investors prone to behavioral biases and if so, what are they? • Do we observe the disposition effect and if so, when?