Volume 2, Number 1, 2001 Abstracts
© Copyright Erlbaum 2000 & 2001

EDITORIAL COMMENTARY

The Effects of Subject Pool and Design Experience on Rationality in Experimental Asset Markets
Lucy F. Ackert
Bryan K. Church

Empirical evidence suggests that prices do not always reflect fundamental values and individual behavior is often inconsistent with rational expectations theory. We report the results of fourteen experimental asset markets designed to examine whether the in-teractive effect of subject pool and design experience (i.e., previous experience in a market under identical conditions) tempers price bubbles and improves forecasting ability. Our main findings are: 1) price run-ups are modest and dissipate quickly when traders are knowledgeable about financial markets and have participated in a previous market under identical conditions; 2) price bubbles moderate quickly when only a subset of traders are knowledgeable and experienced; 3) the heterogeneity of expectations about price changes is smaller in markets with knowledgeable and experienced traders, even if such traders only represent a subset of the market; and 4) individual forecasts of prices are not consistent with the predictions of the rational expectations model in any market, although absolute forecast errors are smaller for subjects who are knowledgeable of financial markets and for those subjects who have participated in a previous market. In sum, our findings suggest that markets populated by at least a subset of knowledgeable and experienced traders behave rationally, even though average individual behavior can be characterized as irrational.

The Influence of Gender on the Perception and Response to Investment Risk: The Case of Professional Investors
Robert A. Olsen
Constance M. Cox

In a previous issue of this journal, O'Barr and Conley, noted that cultural differences caused public pension fund managers to invest differently and more conservatively than their private fund counterparts. An additional insight to is that cultural factors have a non-trivial affect on how assets are managed. This article continues with this theme and suggests that, even with equivalent training, experience and information, investment managers make different decisions based on identifiable cultural differences. This study focuses on professional men and women investment managers who perceive and respond to risk differently. This supports O'Barr and Conley, suggesting cultural factors may be responsible for this risk related gender effect. There is extensive evidence that when faced with social and technological hazards, women are more risk averse than men. This appears to be so even when decision-makers of both genders have the same level of expertise and experience. In the investment realm, non-professional women investors also appear to accept less risk than their male counterparts, after controlling for factors such as age, education, wealth and experience. Although the precise reason for this gender difference in risk taking is un-known, it appears to be related to evolutionary and social factors. This paper is unique in that it investigates the risk/gender difference for professionally trained investors. It is found that women investors weight risk attributes, such as possibility of loss and ambiguity, more heavily than their male colleagues. In addition, women tend to emphasize risk reduction more than men in portfolio construction. While gender differences appear to influence perceptions of risk and recommendations to clients, these differences tend to be the most significant for assets and portfolios at risk extremes.

The Psychology of Financial Decision-Making: Applications to Trading, Dealing, and Investment Analysis
Denis J. Hilton

This paper offers a whole range of areas in which the latest work on psychology, social psychology and behavioral finance could offer competitive advantage both to financial markets as well as individual firms. The aim is to identify potential applications of experimental and organizational psychology to improve the efficiency of financial institutions. The focus is on two major areas of application: trading and dealing in currencies, and investment decision-making. The paper reviews the seven deadly sins in individual decision-making showing how the financial decision-maker may fall prey to them. It also suggests how this knowledge can be put to use in improving efficiency in financial strategy, marketing, and human resource management (selection, training, decision-aiding, and control). The paper concludes by identifying important questions for the financial markets to consider if they are serious about improving managerial practices.

Book Review by Jason Zweig: The Perception of Risk, Paul Slovic, 2000, London: Earthscan Publications.