Experimental Economics Seminar - Robizon Khubulashvili (University of Pittsburgh)

Title:  Heterogeneity in Investors’ Behaviour: The Effects of Biased Beliefs

Abstract: We study how investors react to the arrival of new information when they are considering whether to pull out their investment or not. Proprietary data from online bookmaker shows that bettors’ (investors’) decision to cash-out their bet (investment) follows systematic patterns. To better understand how new information affects investors’ decisions, we create a new game, the "cash-out” game, and study it in the lab. We find that we can divide the population of investors into two main groups. The first group is more likely to withdraw an investment if they get good news — these investors under-interpret good news. The second group is more likely to withdraw an investment after getting negative news — these investors over-interpret bad news. We show the external validity of our results by matching bookmaker and experimental data. We claim that biases in belief updating can be used by a market designer to extract a larger fraction of consumer surplus.