Template-Type: ReDIF-Paper 1.0
Author-Name: Giovanni Ferri 
Author-X-Name-First: Giovanni
Author-X-Name-Last: Ferri
Author-Email: g.ferri@lumsa.it
Author-Workplace-Name: LUMSA University 
Author-Name: Matteo Ploner 
Author-X-Name-First: Matteo 
Author-X-Name-Last: Ploner
Author-Email: @lumsa.it
Author-Workplace-Name: University of Trento
Author-Name: Matteo Rizzolli
Author-X-Name-First: Matteo 
Author-X-Name-Last: Rizzolli
Author-Email: m.rizzolli@lumsa.it
Author-Workplace-Name: LUMSA University
Title: Count To Ten Before Trading: Evidence On The Role Of Deliberation In Experimental Financial Markets

Abstract: Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long tested both the determinant of financial bubbles’ formation and institutional designs meant at solving such bubbles. In line with this literature we explore whether the dual process theory proposed by Kahneman (2011) can explain bubbles’ formation. As compared with our benchmark FAST treatment, we deliberately slow down the decision making process in our SLOW treatment and thus we induce more System-2 type reasoning. We show that high volatility and extreme realizations are greatly reduced and average prices remain consistently aligned with the expected fundamental value once risk-aversion is considered. We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment. We also show that the SLOW condition clears out the hot-hand fallacy. We finally derive some tentative policy implications concerning slowing down finance.

Length: 22 pages
Creation-Date: 2016-03
Publication-Status: 
File-URL: https://repec.lumsa.it/wp/wpC07.pdf
File-Format: Application/pdf
Number: wpC07
Classification-JEL: 
Keywords: Rational vs. emotional choice; Slow vs. fast trading; Dual process
theory; System-1 and System-2; Speculative bubbles; Behavioral finance.
Handle: RePEc:lsa:wpaper:wpC07