Can representativeness heuristic traders survive in a competitive securities market?
نویسنده
چکیده
The literature views aggressive trading behavior as the key for representativeness heuristic traders to survive in competition with rational traders. This paper provides another reason. That is, in this dynamic model of a competitive securities market, representativeness heuristic traders can derive more expected profit from the misvaluations (created by noise traders) than can rational traders. Consequently, the expected profit for heuristic traders can be bigger than that for rational traders. If traders’ types replicate according to the profitability of the strategies, heuristic traders can survive or even drive out rational traders. & 2012 Elsevier B.V. All rights reserved. JEL classification: G02
منابع مشابه
Securities Trading when Liquidity Providers are Informed
Securities Trading when Liquidity Providers are Informed Abstract We study securities trading when liquidity is provided by informed agents—either because dealers have superior access to market information or because informed traders exploit strategies involving limit orders. In the case of informed dealers, we show that dealers and informed traders profit more at the expense of uninformed liqu...
متن کاملStock Index Futures the Case for Markets in Baskets of Securities
We provide an explanation for the explosive growth in the popularity of Stock Index Futures contracts. In our economy there are three broad classes of traders that place orders with a competitive market maker that sets a bid-ask spread arising from adverse selection. Informed traders trade on the basis of their private information about the value of particular securities. Liquidity traders trad...
متن کاملBayesian equilibrium in double auctions populated by biased heuristic traders
We use computer simulation to examine three asset markets with imperfect information. In processing imperfect information, traders in the three markets are bayesian, empirical bayesian, and heuristic (representativeness and anchor-and-adjust) respectively. All three converge to the same bayesian equilibrium – although the latter two converge more slowly – without profit maximization, natural se...
متن کاملOn the survival of overcon"dent traders in a competitive securities market
Recent research has proposed several ways in which overcon"dent traders can persist in competition with rational traders. This paper o!ers an additional reason: overcon"dent traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static pro"tability of overcon"dent versus rational trading strategies, and the dynamic evolu...
متن کاملDoes Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias
This paper studies belief heterogeneity in a benchmark competitive asset market: a market for Arrow-Debreu securities. We show that differences in agents’ beliefs lead to a systematic pricing pattern, the favorite longshot bias (FLB): securities with a low payout probability are overpriced while securities with high probability payout are underpriced. We apply demand estimation techniques to be...
متن کامل