Document Type
Article
Publication Date
2-29-2024
Abstract
There is growing evidence that human cognitive abilities strongly influence individual trader financial performance. Much of this evidence has been established in experimental asset markets whose participants are exclusively human traders. However, algorithmic trading has reshaped financial markets, raising the issue of whether these assessments on the impact of cognititive abilities still hold in these settings, particularly in markets with low latency algorithmic traders. Extending previous findings in experimental asset markets, we examine how individual cognitive abilities—reaction time, trader intuition (Theory of Mind), and cognitive reflection—affect human earnings in induced demand and supply markets with and without algorithmic traders of varying speed. We find that a faster reaction time improves performance in human-only markets but reduces performance in hybrid settings. Cognitive reflection improves outcomes in slower environments, especially for sellers, but shows mixed effects in markets with lower latency algorithmic traders. Notably, higher Theory of Mind is often negatively associated with buyer earnings, contrasting prior findings of beneficial and complementary effects in asset markets. Our results highlight that the impact of cognitive abilities on trading performance depends on market composition, trader role, and the presence and speed of algorithmic traders.
Recommended Citation
Peng, Y., Shachat, J., Wei, L., & Zhang, S. S. (2024). Cognitive abilities and individual earnings in hybrid continuous double auctions. ESI Working Paper 24-05. https://digitalcommons.chapman.edu/esi_working_papers/401/
Comments
ESI Working Paper 24-05