Cognitive ability and earnings performance: Evidence from double auction market experiments

Abstract

Our goal in this paper is to understand how heterogeneity in people’s cognitive ability leads to different market behavior, and thus different market performance. To do this, subjects with heterogeneous working memory capacity (WMC) were placed in a double-auction environment to compete against artificial traders. We considered two treatments which differ in the artificial traders. The artificial traders are truth-telling in the first treatment, but demonstrate adaptive trading behavior in the second one. Our results show that working memory capacity has a significantly positive effect on subjects’ market performance, and the performance gap caused by cognitive ability, while narrowing over time, remains significant by the end of experiment. We find that differences in subjects’ performance resulted from their behavior: high-WMC subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions, and they tended to underbid more than those with lower WMC. Among the five constituent abilities of WMC, we find that it is distinctive abilities which contribute to the overall significance in these two treatments. For the treatment involving truth-telling traders, the relevant factor is the ability of simultaneous processing and storing information; whereas, for the treatment involving adaptive traders, the only one that matters is subjects’ ability to coordinate elements into structures.