Emotions are increasingly inferred linguistically from online data with a goal of predicting off-line behavior. Yet, it is unknown whether emotions inferred linguistically from online communications correlate with actual changes in off-line activity. We analyzed all 886,000 trading decisions and 1,234,822 instant messages of 30 professional day traders over a continuous 2 year period. Linguisti...

Using a change in regulatory fees in Canada in April 2012 that affected algorithmic quoting activities, we analyze the impact of high frequency quoting and trading on market quality, trader behavior, and trading costs and profits. Following the change, algorithmic message traffic, i.e. the number of orders, trades, and order cancellations, dropped by 30% and the bid-ask spread rose by 9%. Using...

In complete markets economies (Sandroni [15]), or in economies with Pareto optimal outcomes (Blume and Easley [9]), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at le...

This article reports an asset market experiment in which asymmetrically informed traders transact through competing dealers. Dealers face a classic adverse selection problem, because some traders have private information regarding the asset value while other traders are uninformed. When dealers cannot communicate outside the market, they price the asset competitively and the market is generally...

How is professional risk-taking influenced by prior results? We examine the impact of past gains or losses on subsequent futures traders’ activity. The evidence provides support for the Gervais and Odean (2001) model of overconfidence: we find little relationship between higher risk taking and unusual success among these traders. Also consistent with Gervais and Odean, successful traders exhibi...

In this paper, we characterize the equilibrium price of a prediction market in which risk averse traders have heterogeneous beliefs in probabilities. We show that the prediction market is accurate, in the sense that the equilibrium price equals the mean beliefs of traders, if and only if the utility function of traders is logarithmic. We also provide a necessary and sufficient condition for the...

I conduct an experiment to observe individual traders’ beliefs and desired behavior in a partial-equilibrium asset market. Isolated traders trade a risky asset in a market with exogenous prices. The price series exhibits a "bubble," diverging strongly from the expected dividend yield. Before trading, traders predict the asset’s price in the upcoming period, the price in the …nal period, and the...

Social scientists draw important lessons for modern development from the medieval Maghribi traders who, it has been argued, lacked effective legal mechanisms for contract enforcement and instead relied on informal sanctions based on collective ostracism within an exclusive coalition. We show that this claim is untenable. Not a single empirical example adduced as evidence of the putative coaliti...

We report on a qualitative investigation of the influence of emotions on the decision-making of traders in four City of London investment banks, a setting where work has been predominantly theorized as dominated by rational analysis. We conclude that emotions and their regulation play a central role in traders‘ decision-making. We find differences between high and low performing traders in how ...

The majority of market theory is only concerned with centralised markets. In this paper, we consider a market that is distributed over a network, allowing us to characterise spatially (or temporally) separated markets. The effect of this modification on the behaviour of a market with a heterogeneous population of traders, under selection through a genetic algorithm, is examined. It is demonstra...