Volume 8, Number 2, 2007 Abstracts
© Copyright Erlbaum 2007

The Trader Interaction Effect on the Impact of Overconfidence on Trading Performance: An Empirical Study
Philip Y. K. Cheng – School of Business and Informatics Australian Catholic University, Sydney

This article extends previous research on how overconfidence affects trading performance in two ways. First, we examine whether the degree of impact is different between an electronic trading market (as in a stock market) and an open outcry environment (as in a futures market). Second, we examine the impact of overconfidence from the perspective of miscalibration, market confidence, the better than average effect, and risk attitudes. The significant findings (5%) indicate that higher overconfidence leads to poorer trading performance generally. However, the degree of impact is higher in an open outcry environment, where there are visual, verbal, and emotional interactions between traders, than in an electronic trading environment, where a trader operates primarily in an isolated setting. Likewise, the traders who choose to trade in an open outcry environment are generally more overconfident than those who trade in a more isolated setting. The contribution of our study is therefore to highlight the importance of interactions between traders in the studies of overconfidence on trading performance. Our findings are based on the trading performance of a sample of 159 tertiary students in a simulated trading environment over six weeks.

Affect and Financial Decision-Making: How Neuroscience Can Inform Market Participants
Richard L. Peterson – Market Psychology Consulting

We review recent neuroscience literature on the influences of moods, attitudes, and emotions (affects) on financial decision-making. Evidence indicates the existence of separate brain systems, linked to affect processing, that are responsible for risk-taking and risk-avoiding behaviors in financial settings. Excessive activation or suppression of either system can lead to errors in investment choices and trading behaviors. We suggest ways for market participants to become aware of the potential impact of affect on their behavior in order to avoid suboptimal financial decisions. This paper has two overall aims: to educate financial practitioners about the origins of emotions that can adversely impact their performance, and to teach investors how to make better financial decisions.

Mental Liquidity
Kenneth L. Fisher – Fisher Investments, Inc.
Meir Statman – Santa Clara University

The Financial/Economic Dichotomy in Social Behavioral Dynamics: The Socionomic Perspective
Robert R. Prechter Jr. – Socionomics Institute, Gainesville, Georgia
Wayne D. Parker – Socionomics Foundation, Gainesville, Georgia

Neoclassical economics does not offer a useful model of finance, because economic and financial behavior have different motivational dynamics. The law of supply and demand operates among rational valuers to produce equilibrium in the marketplace for utilitarian goods and services. The efficient market hypothesis (EMH) is a related model applied to financial markets. The socionomic theory of finance (STF) posits that contextual differences between economics and finance produce different behavior, so that in finance the law of supply and demand is irrelevant, and EMH is inappropriate. In finance, uncertainty about valuations by other homogeneous agents induces unconscious, non-rational herding, which follows endogenously regulated fluctuations in social mood, which in turn determine financial fluctuations. This dynamic produces non-mean-reverting dynamism in financial markets, not equilibrium.

"New Economy" Firms and Momentum
Luis Muga – Public University of Navarre, Spain
Rafael Santamar – Public University of Navarre, Spain

This article evaluates how "new economy" stocks may contribute to the momentum effect. Our results reveal that, by virtue of their distinct characteristics, these assets are more likely to generate momentum returns, and thus to increase the concentration of momentum traders. The combination of these two factors makes the momentum effect stronger in the new economy than in other industries.