What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance

Abstract

Using simulations and experiments, we pinpoint two main drivers of trader performance: cognitive reflection and theory of mind. Both dimensions facilitate traders’ learning about asset valuation. Cognitive reflection helps traders use market signals to update their beliefs whereas theory of mind offers traders crucial hints on the quality of those signals. We show these skills to be complementary because traders benefit from understanding the quality of market signals only if they are capable of processing them. Cognitive reflection relates to previous Behavioral Finance research as it is the best predictor of a trader’s ability to avoid commonly-observed behavioral biases.

Keywords: Experimental asset markets, behavioral finance, cognitive reflection, theory of mind, financial education

JEL Classification: C92, G02