The effect of information strength and weight on behavior in financial markets

Griffin and Tversky (1992) explain evidence of individual over- and underco nfidence as resulting from attending too much to the strength (i.e., extrem ity) of information and not enough to the weight (i.e., statistical reliabi lity) of information. We report two experiments that demonstrate how inform ation strength and weight affect confidence, trading, prices, and wealth in laboratory markets. Our results indicate that information strength and wei ght affect individual over- and underconfidence and that market participant s lack sufficient self-insight to avoid trading when they are biased. As a consequence, market prices are biased, and market participants with high-st rength, low-weight information systematically transfer wealth to participan ts with low-strength, high-weight information. (C) 2001 Academic Press.