Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets

One possible determinant of overpricing on asset markets is a lack
of self-control abilities of traders. Self-control is the
individual capacity to override or inhibit undesired behavioral
tendencies such as impulses and to refrain from acting on them. We
implement the first experiment that is able to address a potential
causal relationship between self-control abilities and systematic
overpricing on financial markets by introducing an exogenous
variation of self-control abilities. Our experimental conditions
seek to detect some of the channels through which individual
self-control problems could transmit into irrational exuberance on
the aggregate level. We observe a strong effect of inhibited
self-control abilities on market overpricing. Our findings are
furthermore robust to reducing self-control abilities only for a
moderate share of traders in a market. Low self-control traders
engage in more speculative behavior early on, but because others
imitate their trading patterns, they do not end up earning less and
are not driven out of the market.