What Have We Learned from Experimental FInance?

Transcript:What Have We Learned from Experimental FInance?:
What Have We Learned from Experimental FInance? Shyam Sunder Yale School of Management Kozminski Academy Warsaw, Poland June 23, 2012 (c) Copyright 2003, Shyam Sunder 2 Questions to Address Why do we need even more data on financial markets? How could the data from such simple “Mickey Mouse” markets help us in a far more complex investment environment? Is experimental finance a branch or variation of behavioral economics/behavioral finance? What have we learned so far from asset market experiments? What is next? (c) Copyright 2003, Shyam Sunder 3 1. Why Do We Need More Data from Experimental Markets? Of all branches of economics, financial economics probably has the most detailed and up-to-date observational data available Consequently, this branch of economics is characterized by one of the strongest empirical traditions Why, then, spend time and money to conduct experiments with financial markets and gather more data? (c) Copyright 2003, Shyam Sunder 4 Transactions v. Expectations Data from the stock exchanges include bids, asks, transaction prices, volume, etc. Data from information services on actions and events that may influence markets Neither does or can report on expectations Theory of financial markets (and economics of uncertainty) is built on expectations Need data on expectations to empirically distinguish among competing theories (c) Copyright 2003, Shyam Sunder 5 Relating Market Actions to Expectations and Parameters In experimental markets, the researcher knows the expectations, and the underlying parameters With this knowledge, we know the price and other predictions of alternative theories We can therefore conduct powerful tests of theories which were not possible from the field data (because we know little about the parameters and expectations that generate the field data from the stock exchanges). Examples to follow (c) Copyright 2003, Shyam Sunder 6 2. What Can Simple Experiments Tell Us about Complex Markets? Experimental markets are typically conducted in simple settings Student subjects of typical laboratory experiments have little experience Security markets are complex, and populated by experienced professionals What could we possibly learn from experiments about the “real” markets? (c) Copyright 2003, Shyam Sunder 7 Simplicity is Science All sciences aim at finding simple principles that explain or predict a large part (rarely all) of the phenomenon of interest Simple models: in math or in laboratory make core as well as convenience assumptions The power of a theory depends on the robustness of its predictions as the data environments deviate from the assumptions of