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Do psychological fallacies influence trading in financial markets? Evidence from the foreign exchange market

Bleaney, Michael; Bougheas, Spiros; Zhiyong, Li

Authors

Michael Bleaney leamb@exmail@nottingham.ac.uk

Li Zhiyong zhiyong.li@dmu.ac.uk



Abstract

Research in both economics and psychology suggests that, when agents predict the next value of a random series, they frequently exhibit two types of biases, which are called the gambler’s fallacy (GF) and the hot hand fallacy (HHF). The gambler’s fallacy is to expect a negative correlation in a process which is in fact random. The hot hands fallacy is more or less the opposite of this – to believe that another heads is more likely after a run of heads. The evidence for these fallacies comes largely from situations where they are not punished (lotteries, casinos and laboratory experiments with random returns). In many real-world situations, such as in financial markets, succumbing to fallacies is costly, which gives an incentive to overcome them. The present study is based on high-frequency data from a market-maker in the foreign exchange market. Trading behaviour is only partly explained by the rational exploitation of past patterns in the data. There is also evidence of the gambler’s fallacy: a tendency to sell the dollar after it has risen persistently or strongly.

Journal Article Type Article
Publication Date 2017
Journal Journal of Behavioral Finance
Print ISSN 1542-7560
Electronic ISSN 1542-7560
Publisher Taylor & Francis (Routledge)
Peer Reviewed Peer Reviewed
Volume 18
Issue 3
Pages 344-357
APA6 Citation Bleaney, M., Bougheas, S., & Zhiyong, L. (2017). Do psychological fallacies influence trading in financial markets? Evidence from the foreign exchange market. Journal of Behavioral Finance, 18(3), 344-357. https://doi.org/10.1080/15427560.2017.1331234
DOI https://doi.org/10.1080/15427560.2017.1331234
Keywords gambler's fallacy, hot hand fallacy, foreign exchange market
Publisher URL https://www.tandfonline.com/doi/full/10.1080/15427560.2017.1331234
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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