Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long studied both the determinants of bubbles and institutional measures to prevent them. Within the framework of the dual process theory, we experimentally investigate whether traders under higher time pressure (Fast condition) behave differently than traders under lower time pressure (Slow condition). We show that the Slow condition heavily dampens market volatility relative to the Fast condition, and that the former generates prices that are overall consistent with the market's fundamental values, once risk aversion is accounted for. We also observe that traders in the Fast condition are prone to the gambler's fallacy, while those in the Slow condition are not.
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Citation
Ferri, Giovanni, Matteo Ploner and Matteo Rizzolli. 2018. "Trading Fast and Slow." AEA RCT Registry. May 04. https://doi.org/10.1257/rct.2954-1.0.