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Cognitive ability and earnings performance: Evidence from double auction market experiments

Cognitive ability and earnings performance: Evidence from double auction market experiments
Cognitive ability and earnings performance: Evidence from double auction market experiments
Our goal in this paper is to understand how heterogeneity in people’s cognitive ability leads to different market behavior, and thus different market performance. To do this, subjects with heterogeneous working memory capacity (WMC) were placed in a double-auction environment to compete against artificial traders. We considered two treatments which differ in the artificial traders. The artificial traders are truth-telling in the first treatment, but demonstrate adaptive trading behavior in the second one. Our results show that working memory capacity has a significantly positive effect on subjects’ market performance, and the performance gap caused by cognitive ability, while narrowing over time, remains significant by the end of experiment. We find that differences in subjects’ performance resulted from their behavior: high-WMC subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions, and they tended to underbid more than those with lower WMC. Among the five constituent abilities of WMC, we find that it is distinctive abilities which contribute to the overall significance in these two treatments. For the treatment involving truth-telling traders, the relevant factor is the ability of simultaneous processing and storing information; whereas, for the treatment involving adaptive traders, the only one that matters is subjects’ ability to coordinate elements into structures.
cognitive ability, Working memory capacity, Double auction markets, Bidding behavior, Earnings performance, Artificial traders
0165-1889
409-440
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Chen, Shu-Heng
13f75ac4-9eeb-4601-b72a-edb0784d112b
Yang, Lee-Xieng
86250104-0888-4a89-a1fc-0bff429f0f57
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Chen, Shu-Heng
13f75ac4-9eeb-4601-b72a-edb0784d112b
Yang, Lee-Xieng
86250104-0888-4a89-a1fc-0bff429f0f57

Tai, Chung-Ching, Chen, Shu-Heng and Yang, Lee-Xieng (2018) Cognitive ability and earnings performance: Evidence from double auction market experiments. Journal of Economic Dynamics and Control, 91, 409-440. (doi:10.1016/j.jedc.2017.12.008).

Record type: Article

Abstract

Our goal in this paper is to understand how heterogeneity in people’s cognitive ability leads to different market behavior, and thus different market performance. To do this, subjects with heterogeneous working memory capacity (WMC) were placed in a double-auction environment to compete against artificial traders. We considered two treatments which differ in the artificial traders. The artificial traders are truth-telling in the first treatment, but demonstrate adaptive trading behavior in the second one. Our results show that working memory capacity has a significantly positive effect on subjects’ market performance, and the performance gap caused by cognitive ability, while narrowing over time, remains significant by the end of experiment. We find that differences in subjects’ performance resulted from their behavior: high-WMC subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions, and they tended to underbid more than those with lower WMC. Among the five constituent abilities of WMC, we find that it is distinctive abilities which contribute to the overall significance in these two treatments. For the treatment involving truth-telling traders, the relevant factor is the ability of simultaneous processing and storing information; whereas, for the treatment involving adaptive traders, the only one that matters is subjects’ ability to coordinate elements into structures.

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More information

Accepted/In Press date: 20 December 2017
e-pub ahead of print date: 27 December 2017
Published date: June 2018
Keywords: cognitive ability, Working memory capacity, Double auction markets, Bidding behavior, Earnings performance, Artificial traders

Identifiers

Local EPrints ID: 434361
URI: http://eprints.soton.ac.uk/id/eprint/434361
ISSN: 0165-1889
PURE UUID: b6ec1185-a258-4d9e-a108-aae4d91db6b0
ORCID for Chung-Ching Tai: ORCID iD orcid.org/0000-0002-2557-177X

Catalogue record

Date deposited: 20 Sep 2019 16:30
Last modified: 30 Apr 2022 01:57

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Contributors

Author: Chung-Ching Tai ORCID iD
Author: Shu-Heng Chen
Author: Lee-Xieng Yang

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