Research
Published
Choice, Deferral and Consistency
Costa-Gomes, M., Cueva, C., Gerasimou, G., Tejiscak, M.
Quantitative Economics - 2022
We report on two novel choice experiments with real goods where subjects in one treatment are forced to choose, as is the norm in economic experiments, while in the other they are not but can instead incur a small cost to defer choice. Using a variety of measures, we find that the active choices (i.e., those that exclude the deferral outside option) of subjects in the nonforced-choice treatment are gener- ally more consistent. We also find that the combined deferral and active-choice behavior of subjects in that treatment is explained better by a model of dominant choice with incomplete preferences than it is by rational choice. Our results suggest that nonforced-choice experiments and models can be helpful in separating people’s rational, hesitant/not-yet-rational and genuinely irrational behavior, and can potentially offer important new insights in revealed preference analysis.
Cueva, C., Iturbe-Ormaetxe, I., Ponti G., Tomás, J.
Journal of Economic Behavior & Organization – 2019
The fact that men trade more than women in financial markets has been attributed to men's overconfidence. However, evidence supporting this view is only indirect. We directly test this conjecture experimentally, by measuring confidence using monetary incentives before participants trade in a simulated market. We find that men are more confident than women in our trading task. Men also trade more, and they hold larger and less diversified portfolios than women. However, we do not find that differences in confidence explain any portion of the gender gap in trading activity. We explore alternative candidate channels such as risk aversion, financial literacy or competitiveness but find that these factors are also unlikely to play a role.
An Experimental Analysis of the Disposition Effect: Who and When?
Journal of Behavioral and Experimental Economics – 2019
Cueva, C., Iturbe-Ormaetxe, I., Ponti G., Tomás, J.
The disposition effect (DE) is a common bias by which investors tend to sell winning assets too soon and hold losing assets too long. We complement the existing evidence in three directions. First, we check whether the DE is robust to realistic features such as transaction costs and competitive payment schemes. Second, by using a gender-balanced design, we check for gender differences. Third, we search for psychological correlates of the DE. We find that the DE is positive and significant in all our treatments. We do not find significant differences across treatments, although transaction costs significantly reduce the propensity to sell both winners and losers. We find somewhat larger DE in women, but this effect is only significant in the second half of the experiment. On the other hand, women are more reluctant to sell losing assets throughout the experiment. Finally, we find that the most significant psychological predictors of the DE are difficulty recognizing one's mistakes and optimism. Subjects scoring high in these traits are less likely to sell at a loss and therefore exhibit a larger DE. Our results provide further suggestive evidence of cognitive dissonance as an important determinant of the DE.
Cueva, C., R.E. Roberts, T.Spencer, N. Rani, M.Tempest, P.N.Tobler, J.Herbert & A.Rustichini
Hormones and Behavior – 2017
Correlative evidence suggests that testosterone promotes dominance and aggression. However, causal evidence is scarce and offers mixed results. To investigate this relationship, we administered testosterone for 48 h to 41 healthy young adult men in a within-subjects, double-blind placebo-controlled balanced crossover design. Subjects played the role of responders in an ultimatum game, where rejecting a low offer is costly, but serves to destroy the proposer's profit. Such action can hence be interpreted as non-physical aggression in response to social provocation. In addition, subjects completed a self-assessed mood questionnaire. As expected, self-reported aggressiveness was a key predictor of ultimatum game rejections. However, while testosterone affected subjective ratings of feeling energetic and interested, our evidence strongly suggests that testosterone had no effect on ultimatum game rejections or on aggressive mood. Our findings illustrate the importance of using causal interventions to assess correlative evidence.
Cognitive (Ir)reflection: New Experimental Evidence
Cueva, C., I. Iturbe-Ormaetxe, E. Mata-Pérez, G. Ponti, M. Sartarelli, H. Yu, and V. Zhukova
Journal of Behavioral and Experimental Economics – 2016
We study how cognitive abilities correlate with behavioral choices by collecting evidence from almost 1200 subjects across eight experimental projects concerning a wide variety of tasks, including some classic risk and social preference elicitation protocols. The Cognitive Reflection Test (CRT) has been administered to all our experimental subjects, which makes our dataset one of the largest in the literature. We partition our subject pool into three groups depending on their CRT performance. Reflective subjects are those answering at least two of the three CRT questions correctly. Impulsive subjects are those who are unable to suppress the instinctive impulse to follow the intuitive – although incorrect – answer in at least two 2 questions. The remaining subjects form a residual group. We find that females score significantly less than males in the CRT and that, in their wrong answers, impulsive ones are observed more frequently. The 2D:4D ratio, which is higher for females, is correlated negatively with subjects’ CRT score. We also find that differences in risk attitudes across CRT groups crucially depend on the elicitation task. Finally, impulsive subjects have higher social (inequity-averse) concerns, while reflective subjects are more likely to satisfy basic consistency requirements in lottery choices.
Is financial instability male-driven? Gender and cognitive skills in experimental asset markets
Cueva, C., Rustichini, A.
Journal of Economic Behavior & Organization – 2015
The hypothesis that price stability would reliably increase with the fraction of women operating in financial markets has been frequently suggested in policy discussions. To test this hypothesis we conducted 10 male-only, 10 female-only and 10 mixed-gender experimental asset markets, and compared the effects of gender composition, confidence, risk attitude and cognitive skills. Male and female markets have comparable volatility and deviations from fundamentals, whereas mixed-gender markets are substantially more stable. On the other hand, higher average cognitive skills of the group are associated with reduced market volatility. Individual-level analysis shows that subjects with higher cognitive skills trade at prices closer to fundamental values and earn significantly higher profits; similarly, mixed markets exhibit lower mispricing, particularly for traders with lower cognitive skills. Our results are demonstrated to hold in other experimental asset market studies, suggesting that a mixed-gender composition reduces mispricing across different types of asset markets.
Cortisol and testosterone increase financial risk taking and may destabilize markets
Cueva, C., R.E. Roberts, T.Spencer, N. Rani, M.Tempest, P.N.Tobler, J.Herbert & A.Rustichini
Scientific Reports – 2015
It is widely known that financial markets can become dangerously unstable, yet it is unclear why. Recent research has highlighted the possibility that endogenous hormones, in particular testosterone and cortisol, may critically influence traders’ financial decision making. Here we show that cortisol, a hormone that modulates the response to physical or psychological stress, predicts instability in financial markets. Specifically, we recorded salivary levels of cortisol and testosterone in people participating in an experimental asset market (N = 142) and found that individual and aggregate levels of endogenous cortisol predict subsequent risk-taking and price instability. We then administered either cortisol (single oral dose of 100 mg hydrocortisone, N = 34) or testosterone (three doses of 10 g transdermal 1% testosterone gel over 48 hours, N = 41) to young males before they played an asset trading game. We found that both cortisol and testosterone shifted investment towards riskier assets. Cortisol appears to affect risk preferences directly, whereas testosterone operates by inducing increased optimism about future price changes. Our results suggest that changes in both cortisol and testosterone could play a destabilizing role in financial markets through increased risk taking behaviour, acting via different behavioural pathways.
Working papers
Motivated beliefs about stock returns
Cueva, C., Iturbe-Ormaetxe, I.
Systematic biases in return expectations may distort stock prices and lead to inefficient capital allocation. In this paper, we report experimental evidence that buying a stock induces optimistically biased expectations when its price drops below the purchase price. We find this effect in a controlled laboratory experiment as well as in a six-week-long online experiment with real stocks in real time. Our results are consistent with the idea that investors hold “motivated beliefs” about losing stocks. In addition, motivated beliefs explain a substantial part of the reluctance to sell these stocks, as in the well-known disposition effect.
Cueva, C.
The COVID-19 pandemic forced almost all professional football matches worlwide to be played in empty stadiums. This large-scale natural experiment offers a unique opportunity to assess the impact of social pressure on decision making and behavior. Using a large dataset from 41 professional football leagues in 30 different countries, I find that the home advantage in match outcomes drops by around one half and that referee bias against away teams disappears following the lockdowns. My results therefore suggest that social pressure exerted by home crowds has an important effect on the behavior of referees and on game outcomes.
Charitable giving, self-image and personality
Cueva, C., Dessí, R.
We provide an experimental test of the role of self-signaling in decisions to donate to charity. Our data strongly supports the theoretical prediction of a nonmonotonic, hill-shaped relationship between self-confidence, proxied by the Social Potency personality trait, and prosocial behavior motivated by image concerns. Making self-image concerns more salient can more than double donations by individuals with medium self-confidence.
Working in progress
Why do cash-to-asset ratios affect asset prices? A model of rational traders facing noisy traders
Cueva, C., Rustichini, A.
Cash-to-asset ratios have a large impact on price paths in experimental asset markets, but there is no satisfactory microeconomic explanation for this finding. We propose a model of rational and noisy traders which ex- plains the effect and provides a benchmark for quantitative analysis. We find support for the model using ours and previous studies’ experimental data. We adopt measures of cognitive skills as independent evidence of rationality. Analysis of individual trading behavior confirms the validity of our model as benchmark for rational trading and as explanation of trading prices, poten- tially relevant for real financial markets and the role of speculation.