Incentive schemes, framing, and market behaviour: evidence from an asset-market experiment

Xuegang Cui, Nick Feltovich and Kun Zhang

We investigate the effects of the form and framing of incentives on price and trading behaviour in experimental asset markets. Subjects buy and sell a high-risk asset, a low-risk asset, and riskless cash over 10 rounds. We vary, between-subjects, the incentive scheme (tournament versus approximately linear), and how the variable portion of payment is framed (bonus versus penalty). Both tournament incentives and penalty framing are associated with significant increases in the price of high-risk asset, relative to either its fundamental value or to the price of the low-risk asset. Additional analysis shows significant gender differences in trading behaviour and performance, and evidence that the two are connected.

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