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Social Psychology Of Fin Markets Essay

598 words - 3 pages

Background info+ thesis statement. Analysis will be descriptive- which means it is concerned with the patterns were real people make actual decisions.

Design of the experiment

What we expect to see
All the participants had the same skills Same knowledge age etc. Monday- expect everyone to buy, because market was up. Tuesday- expect everyone to sell, because market was down.

Findings and analysis
Up market
Buy/sell decisions
The majority of people(83%) bought either Nov 13 or Dec 13 with most trades taking place for the Dec 13 contracts in the first decisions.
In the second decision, 42% of students sold more, which meant they are underconfident; while 54% of students bought more, which means they are overconfident. Only 4% traded with more assets than it was required, which meant they were unrealistically optimistic. Moreover, 18 participants out of 26 were ...view middle of the document...

59% were overconfident, as they bought more, whereas only 26% were underconfident, as they sold more.

Down market
Total: 12 people. In the decision 2, 7(58%) sold more while 5(42%) bought more.
In the decision 3. Analysis: out of 12 people: 10=overconfident, out of them 3 were also underconfident. Those who were underconfident were buying more than selling and they fall into overconfident group only because they sticked to one asset. There was also one unrealistic optimist who generally made more trade than was required. In addition, he was also underconfident because he bought more than sold. The last person was put into underconfident category for the same reason.
In the decision 3, 6 out of 12 were overconfident, one of them was underconfident because he traded less than 10 contracts. Another one was underconfident, as while he was sticking to one asset, he was buying more. 4 people didnt do anything because they either were pessimistic about the future or just were risk averse. 2 remaining people are put in the underconfident category because they were buying more than selling in a down market.

Conclusions and discussions

Aspects of investor psychology reading- relevant summary

Optimism- powerful bias with assymetric effects(most people have biases in the direction of optimism). Optimists have three main features: they exaggerate their talents, underestimate the likehood of bad outcomes which they do not have control, and they have an iluusion of control in faith situations. The combination of overconfidence and optimism is a potent brew, which causes people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events. It also leaves them vulnerable to statistical surprises.
Hindsight biases- People rarely review what they thought about the probability of an event before it occurred. Most people lie to themselves when they exaggerate their earlier estimate and expectations about the future events. Hindsight promotes overconfidence,by making the illusion that the world is more predictable than it is. Moreover, hindsight turns reasonable gambles into foolish mistakes in the mind of investors.

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