New Economics Papers
on Neuroeconomics
Issue of 2012‒09‒09
three papers chosen by

  1. Creativity, analytical skills, personality traits, and innovative capability: A lab experiment By Güth, Werner; Pull, Kerstin; Stadler, Manfred
  2. A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets By Pouget, Sébastien; Villeneuve, Stéphane
  3. All Types Naive and Canny By Aviad Heifetz; Willemien Kets

  1. By: Güth, Werner; Pull, Kerstin; Stadler, Manfred
    Abstract: Innovation economics is usually neglecting the psychological tradition of creativity research. Our study is an attempt to experimentally collect behavioral data revealing in how far personality characteristics like creativity, analytical skills and personality traits on the one hand and innovative capability, the topic of innovation economics, on the other hand are interrelated. We find that participants' performance in innovation games is related to their creativity, risk tolerance and self-control. Other personality traits such as participants' anxiety, independence, tough-mindedness, analytical skills and extraversion at best play a minor role. --
    Keywords: Creativity,Personality traits,Innovation games,Experiments
    JEL: C91 L13 O31
    Date: 2012
  2. By: Pouget, Sébastien; Villeneuve, Stéphane
    Abstract: This paper proposes a dynamic model of financial markets where some investors are prone to the confirmation bias. Following insights from the psychological literature, these agents are assumed to amplify signals that are consistent with their prior views. In a model with public information only, this assumption provides a rationale for the volume-based price momentum documented by Lee and Swaminathan (2000). Our results are also consistent with a variety of other empirically documented phenomena such as bubbles, crashes, reversals and excess price volatility and volume. Novel empirical predictions are derived: i) return continuation should be stronger when biased traders' beliefs are more extreme, and ii) return continuation should be stronger after an increase in trading volume. The implications of our model for short-term quantitative investments are twofold: i) optimal trading strategies involve riding bubbles, and that ii) contrarian trading can be optimal in some market circumstances.
    Keywords: financial markets, psychological biases, confirmation bias, momentum, reversal, bubbles, trading strategies
    Date: 2012–03
  3. By: Aviad Heifetz; Willemien Kets
    Abstract: This paper constructs a type space that contains all types with a finite depth of reasoning, as well as all types with an infinite depth of reasoning - in particular those types for whom finite-depth types are conceivable, or think that infnite-depth types are conceivable in the mind of other players, etcetera. We prove that this type space is uni- versal with respect to the class of type spaces that include types with a finite or infinite depth of reasoning. In particular, we show that it contains the standard universal type space of Mertens and Zamir (1985) as a belief-closed subspace, and that this subspace is characterized by common belief of infinite-depth reasoning. This framework allows us to study the robustness of classical results to small deviations from perfect rationality. As an example, we demonstrate that in the global games of Carlsson and van Damme (1993), a small ‘grain of naivete’ suffices to overturn the classical uniqueness results in that literature. JEL Code: C700, C720, D800, D830
    Keywords: Level-k models, cognitive hierarchy models, universal type space, global games
    Date: 2012–08–04

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