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

Xuegang Cui, Nick Feltovich and Kun Zhang

We investigate how asset prices and trading behaviour are impacted by the structure and framing of incentives, using a lab experiment. 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 (relative versus absolute performance), and how the variable component of incentives is framed (bonus versus penalty), while holding constant the convexity of incentives. Both relative-performance (tournament) incentives and penalty framing are associated with significant increases in the price of the 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 may be connected.

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