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Humans Vs. Machines: The Effect of Behavioural Biases on Optimal Trading

Friday 8 February 2013, 1.15PM

Speaker(s): Daniel Ladley, University of Leicester

Abstract: Modern financial markets provide opportunities for both human and algorithmic traders to interact and trade. The market microstructure literature has typically treated both of these groups as rational, expected utility maximizing individuals. Whilst this argument may be valid for algorithmic traders, experimental evidence has shown that human traders are frequently subject to biases which affect their choices within the market. In this paper we examine a dynamic micro-structure model of a financial market in which risk-neutral expected utility maximising traders and behaviourally biased traders interact. We use numerical techniques to solve the model and show how the both groups affect the market dynamics. At the macro-level we examine how the liquidity, spread and the price discovery ability of the market change under different market compositions whilst at the micro-level effects on the order flow and trading strategies are examined.

Location: Economics Staff Room (EC/202)

Admission: Economics Seminar. All welcome to attend