SSRN Id4606694

Salience in Markets with Multiple Assets: An
Experimental Study
∗
Shuchen Zhao
This version: December 28th 2023
Abstract
I empirically assess the salience theory (Bordalo et al. [2013b]) across various asset
market formats in the context of the growth-value puzzle, as previously posited by
Fama and French [1992]. The salience theory predicts that investors tend to overprice
assets with salient positive returns and underprice those with salient negative returns.
In individual investment tasks, laboratory subjects trade with an automated investor
rather than human counterparts. The salience theory aligns with observed behavior,
where assets with salient positive returns see increased asking prices, and those with
salient negative returns have reduced bid prices. However, market dynamics and feed-
back in call markets drive bids and asks closer to rational expectations. Furthermore,
in the context of continuous double auction markets, subjects even exhibit aversion to
relatively high probabilities of losses (Huber et al. [2019]), a phenomenon at odds with
the predictions of the salience theory.
JEL Classification: C90, D53, G10, G40

Keywords: Growth-value puzzle, Salience theory, Multi-assets markets, Laboratory experi-
ments.
∗
Institute for Advanced Economic Research, Dongbei University of Finance and Economics, Dalian, Liaoning 116025, China;
fenix.zhaoshuchen@dufe.edu.cn; ORCID 0000-0002-3453-0144
Electronic copy available at: https://ssrn.com/abstract=4606694

1 Introduction
In investment contexts and asset markets, the empirical literature (Barberis et al. [2016];
Frydman and Wang [2020]; Cosemans and Frehen [2021]) as well as experimental studies
(Brünner et al. [2011]; Huber et al. [2014]) consistently reveal that assets characterized
by salient (skewed) returns exhibit mispricing tendencies. Specifically, investors tend to
overvalue assets with prominently positive returns while undervaluing assets with promi-
nently negative returns, exemplified in phenomena such as the growth-value puzzle (Fama
and French [1992]) and favorite-longshot bias (Ottaviani and Sørensen [2008]). This phe-
nomenon finds explanation in the salience theory (Bordalo et al. [2012b]; Bordalo et al.
[2013b]), wherein investors’ probability weighting functions are distorted by the returns of
other assets in the market, resulting in deviations from the expected utility theory. Ini-
tially developed within individual decision-making settings, the salience theory has been
subsequently applied to asset markets.
In contrast to prospect theory and skewness preference models (Barberis et al. [2001];
Barberis and Huang [2008]), the salience theory (Bordalo et al. [2013b]) in multi-assets mar-
kets incorporates the crucial consideration that asset prices are influenced by the returns of
other assets. Nevertheless, it overlooks several other factors that may impact asset pricing.
Firstly, investors have the capacity to construct portfolios, and market portfolios exert a
significant influence on asset pricing dynamics (Bossaerts and Plott [2004]; Bossaerts et al.
[2007]). For instance, while salience theory is often employed to elucidate the growth-value
puzzle, it is possible for value stocks and growth stocks to coexist within the same stock mar-
ket, enabling investors to create portfolios that mitigate risk. Secondly, investors commonly
exhibit a natural tendency toward diversification among the available assets in the market
(Mahmoud [2022]). Thirdly, market dynamics themselves often facilitate the efficient aggre-
gation of preferences, and any initial mispricing tendencies may dissipate over time through
processes of learning and experience (Smith et al. [1988]). Fourthly, the traders may also be
influenced by individual pricing bias, such as aversion to high probabilities of losses (Huber
et al. [2019]). Additionally, it is worth noting that among the limited studies that have
examined salience theory with real-world market data, the findings are mixed (Cosemans
and Frehen [2021]; Cakici and Zaremba [2022]). Therefore, while Bordalo et al. [2013b] was
originally developed within the context of multi-assets, it remains uncertain whether the

theory can effectively account for such markets.
This motivate me to study the salience theory in a laboratory market with multiple as-
sets. The fundamental questions that underpin this investigation encompass the persistence
of mispricing effects as posited by the salience theory within experimental markets, akin to
the observations made in individual decision tasks. Moreover, I seek to elucidate the distinct
characteristics of market dynamics in comparison to alternative theoretical predictions. The
experiment can be considered as an examination of the salience theory in asset markets from
Bordalo et al. [2013b]. To the best of my knowledge, my paper is the first paper to formally
test the existence and persistence of salience theory in a laboratory asset market.
To address the research questions, I have constructed two distinct risky assets, denoted
as Asset A and Asset B, each characterized by two potential states. Both assets exhibit
equivalent expected returns and variances, while diverging inversely in terms of skewness.
This return structure closely emulates the return structure of the growth-value puzzle as
articulated by Bordalo et al. [2013b]. Asset A is characterized by a positive skewness,
featuring a scenario where there exists a modest likelihood of attaining substantial profits,
juxtaposed against a more prevalent scenario of incurring minimal losses in comparison to its
expected return. Conversely, Asset B possesses a negative skewness, typified by a substantial
likelihood of realizing modest profits, juxtaposed with a relatively rare scenario of incurring
significant losses. Given the propensity of investors, as posited by the salience theory, to
assign heightened weight to states with salient returns, the subjects are predicted to overprice
Asset A and underprice Asset B compared to the rational expectations.
To bridge the transition from individual decision problems to asset markets, I initiate
with an individual investment task similar to Becker et al. [1964]. In this “BDM market”, the
subjects concurrently trade two risky assets with an automated computer investor through
the submission of bids and asks for each asset. The computer investor then proposes random
prices, and trades occur based on the relationship between these random prices and the
subjects’ bids and asks. Notably, the BDM market introduces a distinct trade framing
compared to previous experiments with lottery selections, allowing participants to express
their willingness to pay and accept. The BDM market also implies a price taker assumption
wherein the investor’s market price is exogenously determined rather than endogenously
influenced by the subjects. Experimental results confirm that salience theory accurately

predicts individual behavior in the BDM markets. Asset A consistently commands higher
average bid and ask prices compared to Asset B. Furthermore, the influence of salience payoff
on bids and asks exhibits asymmetry. The salient upside of Asset A elevates asking prices,
while the salient downside of Asset B mainly reduces bid prices. This asymmetry suggests
that the overpricing of Asset A is primarily motivated by factors on the supply side, whereas
the underpricing of Asset B is driven by influences from the demand side. I also observe an
significant endowment effect within the BDM market.
In the subsequent phase of the experiment, the research transitions into asset market
environments. Initially, a call market is constructed, where participants are required to
submit both a bid and an ask for each of the two risky assets. However, the market price is
determined by all the traders in the group of 8 subjects. In comparison to the BDM market,
the call market is more game theoretical and represents a notable progression towards real-
world financial markets, though without the presence of feedback mechanisms within trading
periods. Akin to the BDM market, participants in the call market persist in the practice
of overpricing Asset A and underpricing Asset B through their bid and ask submissions.
However, the market interaction and feedback exert a corrective influence, progressively
aligning the bids and asks with the rational expectation (RE hereafter) price. Consequently,
the market prices for both assets converge towards proximity with the RE price.
I then consider a one-period continuous double auction (CDA, Huber et al. [2014]) with
a market size of 8 subjects. This market introduces dynamic interactions among subjects
and is frequently applied in experimental research. Within this setting, participants engage
in trading activities involving the two risky assets, facilitated by a full order book. I consider
two distinct variants of the CDA market. The first variant, denoted as “A2S2”, represents an
incomplete market where the states of the two assets are independent. In contrast, the second
variant, labeled “A2S2de”, corresponds to a complete market configuration where the states
of the two assets are perfectly correlated. In contrast to the findings observed in the BDM
market and the call market, the outcomes in both of the CDA markets fail to substantiate
the predictions by the salience theory. Specifically, Asset B exhibits overpricing tendencies
beyond the RE price, while Asset A is valued around the RE price. This suggests that
the subjects in these CDA markets exhibit aversion towards the relative high probability of
losses associated with Asset A, while displaying a comparatively reduced concern regarding

the relative low probability of incurring substantial losses with Asset B. This observation
aligns with a recent discovery articulated by Huber et al. [2019].
In addition to the aforementioned theoretical models, the observed mispricing within

the current return structure could potentially be attributed to the influences of skewness
preference and prospect theory. To investigate the contributions of these alternative factors
in shaping market dynamics, I have designed a specific CDA market configuration. In this
configuration, denoted as “A1S2”, the subjects engage in trading activities involving a single
asset, either Asset A or Asset B. This treatment eliminates the presence of a salient coun-
terpart when determining asset prices. The persistence of mispricing in this “A1S2” market
would imply that participants are influenced by the absolute skewed return distribution of
the asset. Conversely, if mispricing were to vanish, it would suggest that participants are
primarily responsive to the relative characteristics of the assets rather than the absolute char-
acteristics of the returns. This controlled experiment allows for a more precise evaluation
of the role played by skewness preference and prospect theory in shaping market outcomes.
The experimental outcomes clearly show that the subjects follow the rational expectation
when there is only one asset in the market.
The paper contributes to the literature from the following perspectives. Firstly, it is the
first paper that formally test salience theory, with a particular focus on Bordalo et al. [2013b],
within a controlled laboratory asset market setting. This pioneering endeavor offers valuable
experimental evidence that enhances our comprehension of the salience theory’s applicability
within dynamic market environments. Moreover, the insights from this research contribute
to the broader literature on capital asset pricing (Bossaerts et al. [2007]) and the aversion
to high probabilities of losses (Huber et al. [2019]). Secondly, since the salience theory was
originally conceived to address individual decision-making puzzles, this paper contributes
to the literature exploring whether individual biases and preference are relevant for market
prices, aligning with studies such as Gode and Sunder [1993], Coval and Shumway [2005],
Shefrin [2008], and Hirshleifer [2015]. Lastly, this research offers insights into the mixed
empirical evidence surrounding the salience theory (Cosemans and Frehen [2021]; Cakici
and Zaremba [2022]). It contributes to our understanding of the conditions under which
mispricing can manifest in real-world asset markets, shedding light on the factors at play
within these complex economic systems.

The paper is organized as follows. Section 2 lists the literature related to our discussion.
Section 3 reviews salience theory in asset markets. The experimental design is given in
Section 4. Section 5 reports the experimental results and Section 6 discusses some alternative
explanations other than the salience theory. The paper is concluded in Section 7.
2 Literature
Salience plays a pivotal role in various critical domains of economic activity, encompassing a
wide spectrum of decision-making processes. These domains include taxation (Chetty et al.
[2009]), food consumption (Bollinger et al. [2011]), charitable behavior (Jonas et al. [2013]),
electricity consumption (Gilbert and Zivin [2014]), workforce productivity (Englmaier et al.
[2017]), and more. In the realm of asset markets, the prominence of salient news concern-
ing potential return fluctuations has been empirically substantiated as a significant factor
influencing stock prices and trading volume (Barber and Odean [2008]; Birz [2017]). Further-
more, it is notable that the impact of information varies between the firm level and market
level (Ramos et al. [2020]). In a notable natural experiment, Frydman and Wang [2020] have
provided evidence suggesting that a salience shock causally increases the disposition effect
by 17 percent.
The phenomenon of mispricing, particularly concerning skewed assets and extreme re-
turns, has also been documented within controlled laboratory settings, as evidenced in studies
such as Brünner et al. [2011] and Gödker and Lukas [2021]. Notably, prospect theory and
skewness preference models (Kahneman and Tversky [1979]; Tversky and Kahneman [1992];
Barberis et al. [2001]; Barberis and Huang [2008]; Dertwinkel-Kalt and Köster [2020]) con-
stitute interpretations concerning the subjective weighting of skewed assets. These models,
along with their various extensions, have been instrumental in elucidating behavioral puzzles
such as Allais paradoxes and preference reversals. However, they do not account for situ-
ations wherein the salience of an asset is influenced by its relative relationship with other
assets rather than relying solely on absolute characteristics.
To address this question, the salience theory has been developed within the context
of individual decision-making to lottery selections, as initially proposed by Bordalo et al.
[2012b]. In the foundational model, individuals make choices among a finite set of lotteries.

In a manner akin to prospect theory and other context-dependent models (Camerer [1995]),
individuals assign subjective weights to the probabilities associated with each state of these
lotteries, incorporating distortions. However, in contrast to prospect theory, salience theory
computes the salience of each state by comparing the lottery’s own payoff to the payoffs of
other assets, rather than relying on a subjective probability weighting function. As a con-
sequence, the decisions of individuals under the salience theory diverge from the predictions
of both expected utility theory and prospect theory.
While it is worth noting that the certainty equivalent can sometimes pose challenges
when utilizing the rank-based salience function (Kontek [2016]), and that the theory may
be considered a specific case within the broader context of general regret theory (Herweg
and Müller [2021]), this model has been expansively extended and applied to a diverse array
of empirical scenarios. These applications encompass consumer decision-making (Bordalo
et al. [2013a]), asset pricing (Bordalo et al. [2013b]), firm competition (Bordalo et al. [2016];
Herweg et al. [2018]), and multi-dimensional lotteries (Schneider et al. [2023]). Further-
more, the theory has been enriched through extensions that incorporate memory of histor-
ical events (Bordalo et al. [2017]) and axiomatization frameworks that cater to a general
class of correlation-sensitive preferences (Lanzani [2022]). This extensive body of work col-
lectively addresses various behavioral puzzles, including the pervasive risk-seeking behavior,
Allais paradoxes, preference reversals, the growth-value puzzle (Fama and French [1992];
Lakonishok et al. [1994]), and counter-cyclical risk premiums.
Over the past decade, extensive discussions and experimental examinations of the salience
theory have primarily centered around individual decision-making contexts. Notably, the first
inquiries testing the predictions outlined in Bordalo et al. [2012b] concerning Allais para-
doxes can be traced back to Booth and Nolen [2012]. Subsequently, Frydman and Mormann
[2016] utilized eye-tracking data and manipulated visual salience, a method also explored by
Bose et al. [2022]. These studies have collectively corroborated the predictions posited by
Bordalo et al. [2012b] while concurrently engendering several unresolved questions, which
have become the focus of subsequent research. Königsheim et al. [2019] undertook the
joint estimation of parameters encompassing salience theory, expected utility theory, and
rank-dependent utility. Their findings support the notion that approximately 40 percent
of individuals align with the predictions of salience theory. Additionally, Dertwinkel-Kalt

and Köster [2020] concentrated on both the absolute and relative skewness characteristics of
assets, effectively connecting the salience theory to skewness preference. Meanwhile, Bruhin
et al. [2022] endeavored to isolate and quantify the influence of choice set dependence, em-
ploying both common consequence and common ratio Allais paradoxes in their investigations.
Nevertheless, Loewenfeld and Zheng [2021] and Ostermair [2021] claimed that event-splitting
effect plays a more important role. Further expanding the scope, Nielsen et al. [2018] de-
signed experiments controlling for various competing theories including expected utility the-
ory, regret theory, disappointment theory, similarity-based theories, focusing theory, prospect
theory, and common ratio effects. Across these diverse contexts, the effect of salient returns
consistently appears to exert a distorting influence on individual decision-making.1
Nevertheless, the absence of experimental evidence from market environments has cast a
shadow of uncertainty over the applicability of the salience theory in asset markets. Several
critical considerations and empirical findings raise questions regarding the theory’s validity
in such contexts. Firstly, the ability of investors to construct portfolios introduces a potential
deviation from the salience theory, as asset prices are influenced by potential market port-
folios and the covariance matrix of assets. Bossaerts and Plott [2004] and Bossaerts et al.
[2007] conducted large-scale market experiments involving multiple risky and safe assets, in-
cluding assets featuring salient upside characteristics. Their results revealed that prices for
all assets consistently fell below their expected returns. These outcomes align more closely
with the predictions of the Capital Asset Pricing Model (CAPM) and deviate from expec-
tations tied to probability or return distortion. Additionally, research by Noussair and Xu
[2015] suggests that positive (negative) correlations between assets drive prices down (up)
in markets featuring private information and exogenous shocks. Secondly, investors tend to
exhibit a natural inclination towards diversification, even when it is feasible to generate the
same distribution of rewards without diversifying. This inclination towards diversification is
particularly pronounced among risk-averse and loss-averse investors, as evidenced by Mah-
moud [2022]. Thirdly, within market settings, traders learn from one another’s actions and
have the opportunity to refine their pricing strategies over time. While bubbles and mis-
pricing may persist in the early stages of market activity, market mechanisms facilitate the
1
It’s noteworthy to mention that Alós-Ferrer and Ritschel [2022] provide a counterexample, indicating that
the salience effect has a modest impact in explaining preference reversals and cannot be directly transferred
to shape the reversal rates.

efficient aggregation of diverse preferences, leading to rational expectation equilibrium. Con-
sequently, market mispricing tend to diminish towards the later stages of market (Plott and
Sunder [1982]; Smith et al. [1988]; Forsythe and Lundholm [1990]; Lei et al. [2001]). Fourthly,
recent evidence, as highlighted by Huber et al. [2019] and Zeisberger [2022], suggests that
investors place greater emphasis on the probability of incurring losses. This emphasis on
perceived riskiness is supported by the concept of the ”safety-first rule” in asset markets, as
corroborated by surveys conducted among financial professionals (Holzmeister et al. [2020])
and empirical data (Cao et al. [2023]). Moreover, the empirical evidence pertaining to the
salience theory remains mixed, with studies providing support for the theory (Cosemans
and Frehen [2021]; Chen et al. [2022]), alongside literature that underscores its limitations
(Cakici and Zaremba [2022]). These multifaceted considerations collectively warrant a cau-
tious approach to interpreting the applicability of the salience theory within the intricate
dynamics of asset markets.
The current literature that investigates experimental markets involving multiple assets,
as outlined in the preceding discussion, has not yet been equipped to rigorously assess the
validity of the salience theory.2 Within this literature, experiments typically either involve
the sequential trading of a single asset without an alternative asset for comparison within the
same market (Straznicka and Weber [2011]; Huber et al. [2014]), or they encompass scenarios
with multiple assets but concentrate on different research questions, such as ambiguity (Sarin
and Weber [1993]; Füllbrunn et al. [2014]), truncation (Ackert et al. [2009]; Ackert et al.
[2012]), short selling (Ackert et al. [2006]), exchange-traded funds (Duffy et al. [2022a]),
incentive schemes (Kleinlercher et al. [2014]), speculation (Lei et al. [2001]), futures markets
(Porter and Smith [1995]), and rate-of-return parity (Fisher and Kelly [2000]; Childs and
Mestelman [2006]). Among the papers that explore skewed assets, the underlying asset
structures were not explicitly designed to examine the salience theory. Furthermore, none
of these experiments undertake a systematic comparison between individual behavior and
market-level behavior. These gaps and limitations within the existing literature serve as the
impetus for our endeavor to investigate the salience theory within the controlled laboratory
setting of a market.
To the best of our knowledge, our paper represents the first paper to formally test the
2
For a comprehensive review, please refer to Duffy et al. [2022b].

existence and persistence of salience theory within a laboratory market. Distinguishing our
work from previous studies exploring the salience theory, our research elevates the testing
scenarios from individual lottery selections to the dynamic context of a multi-assets market.
Furthermore, in contrast to the broader experimental market literature, our paper constructs
an asset structure that directly assesses the predictions by Bordalo et al. [2013b]. The
empirical evidence generated from our study holds the potential to enrich our comprehension
of the salience theory, as well as shed light on other related theoretical models (Bossaerts
et al. [2007]; Huber et al. [2019]) within the dynamics of a market setting. Additionally,
our contribution extends to the broader literature that delves into the question of whether
individual biases and preferences are relevant in shaping market prices (Gode and Sunder
[1993]; Coval and Shumway [2005]; Shefrin [2008].
3 Model
In this section, I will introduce the asset pricing model outlined in Bordalo et al. [2013b]
(BGS). This model will serve as the foundation upon which our experiment is based, and
it will provide guidance for the formulation of our research hypotheses. Other alternative
predictions mentioned in the introduction will be discussed briefly in the experimental hy-
potheses section and in Appendix A. It is important to note that throughout this paper,
when the terms “overprice” or “underprice” are used, they always refer to a comparison
with the RE price.
There are two periods t = 0, 1 and a measure 1 of identical investors. The investors
are risk-neutral (assume u(x) = x)3 and maximize the two-period consumption (c0 , c1 ). The
investors receive w0 as endowment and 1 unit of each of the J assets.4 Then they choose
the trade amount {a1 , . . . , aJ } of J assets. There are also S states of nature s = 1, . . . , S,
each occurring with probability πs with Ss=1 πs = 1.5 Asset j pays dividend xjs in state s
P
3
One of the major contributions of the BGS model is that price distortion exists even with risk-neutral
investors. Removing this assumption does not change the mispricing, since the baseline price with no
distortion also changes with risk preference. But the RE price is no longer the baseline price in this case.
4
The BGS model does not account for the effect of market portfolio on asset pricing as long as it does
not affect the availability of the assets.
5
The BGS model does not assume whether the market is complete or incomplete. I consider both cases

at t = 1.
The investors weight the dividend of asset j at each state s differently based on the
salience of each xjs . The salience of xjs depends on how it compares to the average market
payoff at state s with xs = J1 j xjs .6 The salience function σ(xjs , xs ), originally defined by
P
Bordalo et al. [2012b], follows two major properties: ordering and diminishing sensitivity. I
use the following salience function in this paper.
|xjs − xs |
σ(xjs , xs ) = . (1)
|xjs | + |xs | + θ
The salience functions distort the probability of each state for each asset in the following
way. For asset j, the model calculates the salience of its dividend in all states and gives each
dividend a ranking rjs from 1 (the most salient) to S (least salient). The adjusted weight of
xjs is
δ rjs
wjs = P rjs′ (2)
s ′ πs ′ δ
δ ∈ (0, 1] captures the degree to which the investor neglects non-salient payoffs. When
δ = 1, the investors are rational and there is no distortion in probabilities. When δ < 1, the
investors overweight the states of the salient payoffs. Following the estimation from Bordalo
et al. [2012b] and Königsheim et al. [2019], I use δ = 0.7 and θ = 0.1 in my experimental
hypotheses. Adjusting the two parameters in my experiment will not affect the direction of
the mispricing but only impact its magnitude. In other words, investors under the influence
of salient thinking either collectively overprice the asset j or underprice it.
The investor’s decision is to maximize the expected utility at period 0 as

! !
X X X
w0 − aj · p j + πs (aj + 1) · wjs · xjs (3)
j s j
Where pj is the market price for asset j. By solving the maximization problem, we have
pj = E[wjs · xjs ] = E[xjs ] + cov[wjs , xjs ] (4)
in my CDA market treatments.

6
The “salience reference” becomes tricky when J = 2, Bordalo et al. [2012b] use the other lottery instead
of the market average in their model. Under my experimental parameters, both salience references provide
similar predictions. See Appendix A for details.
10

In this context, the price of asset j can be expressed as the expected value of its future
payoff xjs , augmented by the covariance between payoffs and salience weights. Notably, when
δ < 1, each asset j commands a risk premium equivalent to −cov[wjs , xjs ]. This model thus
establishes a framework in which exceptionally salient payoffs are overweighted, influenced
exclusively by the payoffs associated with individual assets, rendering it context-dependent.
As a result of this model’s formulation, assets may exhibit overpricing or underpricing con-
tingent on the sign of the salient payoff. The following proposition encapsulates the core
tenets of the model and will serve as a guiding principle for our experimental study.
Proposition 1. Compared to its RE price, asset j will be overpriced if cov[wjs , xjs ] > 0 and
underpriced otherwise.
Let’s consider a simplified scenario in which there are two states of assets (s = 1, 2),
and the market has no aggregate risk (xs = x holds true for all states). Asset j yields
payoffs in the two states as follows: (xj1 , xj2 ) = (x + G, x − L). I have assumed that
π1 G = π2 L, ensuring that the RE price remains equal to x. Based on the properties of the
salience function, we discern that the upside G is more salient than the downside L when
σ(x + G, x) > σ(x − L, x). Within this simplified framework, we can elucidate the growth-
value puzzle. When the magnitude of G greatly surpasses that of L (leading to small p1
and large p2 ), asset j transforms into a growth stock and consequently becomes overpriced.
Conversely, when L significantly exceeds G, asset j assumes the characteristics of a value
stock, thereby experiencing underpricing.
The BGS model applies the market clearing condition as aj = 0 for all j. In a market
with identical investors, this condition renders the market stagnant due to the absence of
either the demand side or the supply side. The market equilibrium price is then determined
by setting the first-order conditions equal to 0. To extend the market clearing condition to
account for heterogeneous investors, following the approach proposed by Gjerstad and Hall
[2005], I consider a market where investors i exhibit diverse attitudes towards salience, while
all being salient thinkers (δi ∈ (0, 1)). Given eq (4) for any asset j, investors will collectively
either overvalue or undervalue the asset, differing only in the magnitude of the misvaluation.
With linear demands functions by the first order conditions, the market price of asset j will
still be either overpriced or underpriced, represented as pj ∈ (min(pji ), max(pji )).
11

For instance, considering the simplified scenario mentioned previously and focus on an
asset j with σ(x + G, x) > σ(x − L, x). In a market comprised of salient thinkers, all
salient thinkers will overvalue the asset above x, regardless of their δi . If we set the market
price of asset j at x, all salient thinkers will have excess demand for asset j resulting in a
positive market demand for asset j at price x with no market supply. Consequently, this
scenario illustrates that the market equilibrium price for asset j is above x, aligning with
the Proposition 1.
Proposition 1 remains qualitatively unchanged and remains unaffected even if a fraction

of rational traders (δ = 1) is introduced to the market. Potential counterexamples to Propo-
sition 1 would necessitate a significant proportion of investors who value assets inversely.
For instance, overvaluing assets with salient downsides or undervaluing assets with salient
upsides.
4 Experimental Design
The experiment employs a 5 × 3 design, encompassing five distinct market formats between
subjects, and three parameter sets governing the asset structure within subjects. First, I
will introduce the asset structure that remains consistent across all market formats. Subse-
quently, I will discuss each market format.
Each experimental session comprises multiple independent trading periods, contingent

upon the specific market format utilized. The payoff for each trading period encompasses
the total return derived from the assets in addition to any remaining cash. At the con-
clusion of the session, one non-practice period will be randomly selected, and subjects will
receive compensation based on their payoff for that chosen period, converted into real-world
currency, along with a $5 show-up fee.
4.1 Assets Structure
Expanding upon the simplified example presented in the model section, I have established
two one-period indivisible assets, each with two states. These assets are denoted as Asset A
12

and Asset B, and their respective payoff structures are detailed in Table 1.
Asset A (salient upside) Asset B (salient downside)

State 1 (with prob π1 ) x+G x-G
State 2 (with prob π2 ) x-L x+L
Table 1: Asset information.
Within the provided payoff structure, it is noteworthy that the market average return
at each state and the RE price for both assets equal to x. This signifies the absence of
any aggregate risk between the two states, ensuring that both assets offer an equivalent
expected return. In general, I have configured the parameters such that state 1 occurs with
a substantial G but a low probability, whereas state 2 occurs with a modest L but a high
probability. Under these parameter settings, Asset A assumes the characteristics of a growth
stock, featuring a low probability of yielding a substantial return and a high probability of
incurring a comparatively minor loss relative to the market average return. Conversely, Asset
B adopts the traits of a value stock, entailing a high probability of generating a modest return
and a low probability of incurring a substantial loss.
The experiment employs three distinct parameter sets, with the constant value of x set
at 100. The parameters for gG = (G, L, π1 , π2 ) are adjusted within each experimental session,
yielding three parameter configurations: g80 = (80, 20, 0.2, 0.8), g70 = (70, 30, 0.3, 0.7), and
g90 = (90, 10, 0.1, 0.9).7 It is important to note that, across all parameter sets, both assets
exhibit identical mean returns, variances, kurtosis, and opposite skewness. Specifically, Asset
A consistently demonstrates positive skewness, while Asset B consistently displays negative
skewness. Table 2 provides the predictions under these three parameter sets, as derived from
the BGS model. It is worth noting that there are slight disparities between the assumptions
of state independence and salience reference in Bordalo et al. [2012b] and the BGS model,
leading to variations in asset pricing. Further exploration of the distinct predictions among
parameter sets, as well as other alternative predictions, can be found in Appendix A.
7
Based on Kontek [2016], πs adopted in the experiment are well-defined.
13

Asset A Asset B
g80 106.3 93.7
g70 108.0 92.0
g90 103.7 96.3
Table 2: Predicted asset prices under the three sets of parameters. The RE price is 100.
4.2 BDM Market
Moving on to the first market format, the BDM “market” resembles an individual investment
task akin to the one described in Becker et al. [1964]. In this BDM market, each subject
engages in trading activities with an automated computer investor, eliminating interactions
with other subjects. The experiment consists of 30 trading periods, each lasting 80 seconds,
with 6 practice periods and 24 payment periods.
Regarding the three parameter sets that vary within each session, the 30 trading periods
employ two game sequences to mitigate any potential order effects. The first sequence adheres
to the order (g80 ∗ 2, g70 ∗ 2, g90 ∗ 2, g80 ∗ 4, g70 ∗ 4, g90 ∗ 4, g90 ∗ 4, g70 ∗ 4, g80 ∗ 4). Subjects
commence with six practice periods conducted in the order of 2 ∗ g80 , 2 ∗ g70 , and 2 ∗ g90 .
The 24 payment periods are equally divided into two 12-period blocks. In the first block,
subjects trade in the order of 4 ∗ g80 , 4 ∗ g70 , and 4 ∗ g90 . Subsequently, in the second
block, they trade in the reverse order. Similarly, the second sequence follows the order
(g70 ∗ 2, g80 ∗ 2, g90 ∗ 2, g70 ∗ 4, g80 ∗ 4, g90 ∗ 4, g90 ∗ 4, g80 ∗ 4, g70 ∗ 4). By designing these two game
sequences, each parameter set is equally likely to precede or follow any particular alternative,
and all three parameter sets occur both in early and late blocks. The two sequence orderings
are balanced within the session design.
During each trading period, subjects receive an endowment of 300 lab currency units
and one unit of each of the two risky assets, A and B. They are tasked with determining
both the bid and ask prices for each of these assets. Once subjects have made their pricing
decisions, a computer investor arrives and provides random prices for each asset. These
random prices are drawn uniformly from the range spanning the maximum and minimum
possible returns for the respective asset. Subsequently, subjects engage in automated trading
with the investor according to the following rules.
14

1. If the random price is less than or equal to the asset’s bid, the subject pays the random
price and buys a unit of the asset from the investor.
2. If the random price is higher than or equal to the asset’s ask, the subject sells a unit
of the asset from the investor and gains the random price.
3. If the random price is between the asset’s bid and ask, no trade happens.
4. The subjects are instructed to ensure that their bid prices do not exceed their ask prices.
This restriction is imposed to prevent irrational behavior, as it would be illogical to
buy at a higher price and sell at a lower price to a computer counterpart.
In contrast to the subsequent call market and the CDA market that will be discussed,
the BDM market simulates a trade framing scenario within an individual decision-making
process but does not involve any market interaction. This distinctive feature allows us to
observe how market interaction influences subjects’ mispricing behavior. The BDM market
also implies a price taker assumption wherein the investor’s market price is exogenously
determined rather than endogenously influenced by the subjects. Furthermore, the BDM
market deviates from previous individual decision experiments related to the salience theory,
as it requires subjects to specify bids and asks rather than choose among lotteries. Overall,
the BDM market establishes a connection between salience theory as applied in asset markets
and its application in individual lottery selection tasks. Additionally, given that the BDM
market constitutes an individual decision task, we adhere to the methodology outlined in
Bordalo et al. [2012b] and select the state for each asset independently.
Figure 1 shows an example of the user interface. In this setup, state independence
between assets, asset information, and subjects’ endowments are all made publicly available.
Subjects are tasked with submitting their bid and ask prices for each asset. Once the subjects
have submitted their decisions, random prices for the investor and the states of the assets
are drawn, and the subjects receive feedback on the outcomes of the current trading period.
The period’s payoff is contingent upon the state of each asset, as well as the subjects’ final
cash and asset holdings. The experiment then proceeds to the next trading period. It should
be noted that subjects are unable to engage in trading and information exchange with other
subjects in this market format.
15

Figure 1: oTree user interface for the BDM market.
4.3 Call Market
The second market format I have designed is a call market with a group size of 8 subjects. In
this game, the setup is akin to the BDM market in several aspects. Subjects are presented
with the same two risky assets, receive identical 300 cash endowments, and are instructed
to submit bid and ask prices for each asset via the same user interface. However, the key
difference lies in the fact that, in this format, subjects engage in anonymous trading with
other group members rather than with an automated investor. The role of the automated
investor’s random price is replaced by the market price, which is determined as the median
price derived from all the bids and asks for each asset. At the end of the period, subjects are
also provided with information regarding the market price of both assets, as well as access
to all the bids and asks placed in the market. The trading rule aligns closely with that of
the BDM market, and is outlined as follows.
16

1. If the market price is less than the asset’s bid, the subject pays the market price and
buys a unit of the asset.
2. If the market price is higher than the asset’s ask, the subject sells a unit of the asset
and gains the market price.
3. If the market price is between the asset’s bid and ask, no trade happens.
4. If any bids or asks coincide exactly with the market price, then as many as possible
are cleared at that price: the light side (e.g., supply if there are more remaining bids
and asks tied at the market price) is fully cleared, and the other heavy side is rationed
randomly.
In each call market session, there are 8 subjects with fixed matching between trading
periods. The subjects participate in a total of 24 trading periods, each lasting 100 seconds.
This includes 6 practice periods and 18 payment periods. Within each session, the three
parameter sets that change are implemented using two balanced game sequences: (g80 ∗
2, g70 ∗ 2, g90 ∗ 2, g80 ∗ 3, g70 ∗ 3, g90 ∗ 3, g90 ∗ 3, g70 ∗ 3, g80 ∗ 3) and (g70 ∗ 2, g80 ∗ 2, g90 ∗ 2, g70 ∗
3, g80 ∗ 3, g90 ∗ 3, g90 ∗ 3, g80 ∗ 3, g70 ∗ 3). Each sequence can be thought of as consisting of
a 6-period practice phase, followed by two 9-period blocks. The states of assets are drawn
independently in the call markets.
The call market introduces a one-time interaction among subjects in the same group,
taking a step closer to real-world market dynamics. Compared to the continuous double
auction (CDA) market, the call market is characterized by static trading, lacking the repeated
interactions and real-time price exchange within trading periods. This design choice allows
us to further dissect the factors influencing the predictability of the salience theory in asset
markets.
4.4 CDA Two Assets Markets
In the third market format, we implement a continuous double auction market with a market
size of 8 subjects. Over the course of the session, 8 subjects engage in 15 trading periods,
each lasting 150 seconds. The session employs a fixed matching protocol and includes 3
17

practice periods and 12 payment periods. The 15-trading-period session follows two balanced
sequences of parameter sets: (g80 , g70 , g90 , g80 ∗ 2, g70 ∗ 2, g90 ∗ 2, g90 ∗ 2, g70 ∗ 2, g80 ∗ 2) and
(g70 , g80 , g90 , g70 ∗ 2, g80 ∗ 2, g90 ∗ 2, g90 ∗ 2, g80 ∗ 2, g70 ∗ 2).
In the CDA market, the subjects engage in anonymous trading with the same group
of counterparts during each trading period. To discourage hedging behavior and encourage
active trading, a second set of initial endowments is provided. Specifically, half of the subjects
receive 2 units of Asset A, while the remaining half is endowed with 2 units of Asset B. It is
crucial to emphasize that this adjustment in initial endowments does not impact the market
portfolio (each market is still equipped with 8 units of Asset A and 8 units of Asset B).
Consequently, the market prices of both assets under the CAPM model remain unaffected,
as does the market price under the BGS model. The cash endowment is also modified to 400
lab currency units, acknowledging that participants are not constrained to trade only one
unit of each asset in the CDA market. It is noteworthy that if we adjust the cash endowment
from 300 to 400 in the BDM and call markets, the market price is unlikely to be affected.
This is due to the fact that participants are constrained to trade at most one unit of each
asset in these markets and 300 is already equal to the maximum possible return of one unit
of Asset A and one unit of Asset B. As a consequence, the two sets of initial endowments
remain comparable throughout the experiment.
The independence of the states of assets is a significant issue when comparing the as-
sumptions of Bordalo et al. [2012b] and the BGS model. In the CDA market, this issue
becomes crucial because the subjects have more flexibility to trade, allowing them to poten-
tially build portfolios more effectively than in the BDM and the call market. To examine
how the assumption of state independence affect the market price, I design two distinct mar-
kets. In the “A2S2de” market format, the states of the two assets are perfectly correlated,
meaning both assets are either both in state 1 or both in state 2. This setup creates a com-
plete market, aligning with the assumptions of the BGS model. Participants have hedging
opportunities and can construct a safe portfolio with a guaranteed return of 100. Conversely,
in the “A2S2” market format, the market is incomplete, and the states of the two assets are
drawn independently. This independence assumption follows Bordalo et al. [2012b] and gen-
erates 2 × 2 combinations of states. While it is still possible to build portfolios and engage
in hedging, the opportunities are less obvious compared to the “A2S2de” market.
18

Figure 2: oTree user interface for the CDA market.
Figure 2 provides an example of the market interface in the CDA market format. The
interface displays essential information such as the period number and market details at
the top. Two risky assets are traded simultaneously within separate trading boxes, and
subjects’ asset and cash information is presented below these boxes. Within each trading
box, subjects have the ability to place bids and asks, as well as accept bids and asks from
other subjects. The interface utilizes a full order book, ensuring that subjects can view all
the bids and asks, along with the complete transaction history. Additionally, subjects’ own
actions are highlighted using distinct colors (buy actions in orange and sell actions in blue).
4.5 CDA Single Asset Market
To investigate whether mispricing is influenced by absolute skewness preference or relative

salience, I conducted a treatment called “A1S2”. In this treatment, only one of the two
assets is allowed to trade in the CDA market. Specifically, we used one asset, two states,
and parameter set g80 in each session. Each session in the “A1S2” market consisted of 14
trading periods, with 2 practice periods and 12 payment periods.
During each trading period, the subjects trade with either Asset A or Asset B under
parameter set g80 . Subjects were endowed with 400 lab currency units and two units of the
19

tradable asset. The sessions employed two balanced game sequences in the following order:
(A, B, A ∗ 3, B ∗ 3, B ∗ 3, A ∗ 3) and (B, A, B ∗ 3, A ∗ 3, A ∗ 3, B ∗ 3). The user interface
resembled that of the CDA market, with the difference being that only one tradable asset
was displayed on the screen.
4.6 Hypotheses
In this subsection, I will summarize the hypotheses that I intend to test in the experiment.
These hypotheses primarily consider the scenario where subjects follow the pricing model
proposed by the BGS model and do not adhere to other potential alternatives. Specifically, I
will examine the case where subjects are assumed to be risk-neutral, influenced solely by the
relative salience of the assets, and do not take into account the possibility of constructing
portfolios. In such a scenario, the assets will exhibit mispricing as predicted by the BGS
model alone. While the conditions assumed in these hypotheses may not entirely mirror
real-world market behavior, they serve as a foundational basis for discussing the experimen-
tal outcomes and potential deviations. Additionally, I will outline the relevant alternative
scenarios for consideration after each hypothesis.
Hypothesis 1. Based on Table 2, when both assets coexist in the market, Asset A will be
overpriced above the RE price 100 and Asset B will be underpriced. The mispricing exist in
(a) the BDM market,
(b) the Call market,
(c) the A2S2 market, and
(d) the A2S2de market.
In cases where the risk-neutral assumption is violated, the RE price may not serve as a
reference for assessing mispricing. However, even in such circumstances, we can still compare
the relative relationship between the prices of the two assets. Under the BGS model, we
should observe that the market price of Asset A is higher than that of Asset B.
The subjects could also be affected by several other alternatives and here are several
possible explanations. See Appendix A for more details. Firstly, if the subjects are not
20

affected by the behavioral biases, the market price converges to the RE price at 100 (e.g.,
Smith et al. [1988]).
Secondly, the capital asset pricing model (Bossaerts and Plott [2004]; Bossaerts et al.
[2007]) suggests that asset prices can be influenced by aggregate market risk aversion, market
portfolios, and the covariance structure of the assets. On the one hand, the market portfolio
has a 1:1 ratio and the covariance matrix is designed so that both assets are always priced
at the RE price when the states of the assets are perfectly correlated. As a result, both
assets should be priced at the RE price in the “A2S2de” market regardless of the market
aggregate risk aversion. On the other hand, when the states of the assets are independent in
the “A2S2” market, the asset prices are solely related to the market aggregate risk aversion
and decreases with it. If the market is risk aversion, both assets are underpriced, otherwise
they are overpriced. However, in both cases, Assets A and B should have the same price
since they share the same mean, the same variance, the same market participants, and the
same market portfolios.
Another potential deviation from the BGS model could result from subjects’ aversion
to high probabilities of losses and their preference for assets with lower probabilities of
losses. This could lead to Asset B having a higher price than Asset A, which is in line with
Huber et al. [2019] and Zeisberger [2022]. The safety-first rule, as suggested by Levy and
Levy [2009], supports this idea when the disaster level is near the RE price. The exact
sign of mispricing compared to the RE price, however, depends on other parameters of the
model, e.g., the subjects’ risk aversion. In addition, the subjects may also averse to the high
probabilities of losses when they have inverse S-shape probability weighting functions.
Furthermore, different market formats, such as the BDM (individual investment), call
market (static market), and CDA markets (dynamic market), might elicit distinct behaviors
from subjects. These differences in market formats could lead to variations in subjects’
behavior and pricing decisions, ultimately affecting market outcomes. In the hypotheses
section, we assume that the subjects behave the same in all the formats as the baseline but
will compare the market outcomes across the market formats.
In the A1S2 market, with one single asset in the market and without the assumption of
the absolute skewness preference, the assets should not be mispriced and the market price
eventually converges to the RE price.
21

Hypothesis 2. The market price in the A1S2 market converges to the RE price 100 for both
Assets A and B.
In the A1S2 market, potential deviations from the BGS model predictions can arise
if subjects are influenced by absolute skewness preference and cumulative prospect theory.
Specifically, Asset A may continue to have a higher price than Asset B in this scenario.
The exact direction of mispricing would still depend on other parameters of the model, but
experimental evidence suggests that subjects are more likely to overprice positively skewed
assets and underprice negatively skewed assets (Straznicka and Weber [2011]; Huber et al.
[2014]; Brünner et al. [2011]). Furthermore, if subjects exhibit aversion to high probabilities
of loss, they may also price Asset B higher than Asset A. It is important to note that, in
the A1S2 market, subjects are unable to build portfolios, which distinguishes this market
format from other two-assets markets. See Appendix A for more details.
Additionally, in the BDM market settings where subjects are asked to specify their will-
ingness to accept (ask) and willingness to pay (bid), I explore another hypothesis related to
the endowment effect.8 Bordalo et al. [2012a] used the salience model to explain the endow-
ment effect9 . Building on a similar theoretical foundation, I anticipate that the endowment
effect will be present in both the BDM markets. I do not test this hypothesis in the call
market and the CDA market, as the bids and asks in that setting might be strategically
determined, making it less likely to elicit subjects’ willingness to accept and willingness to
pay.
Hypothesis 3. In the BDM markets, the spread (difference between bid and ask) is signifi-
cantly larger than zero for both assets.
22

Market Formats Num of Sessions Num of Subjects
BDM 4 40
Call 4 32
A2S2 4 32
A2S2de 4 32
A1S2 4 32
Table 3: Session information. For each market format, game sequences are balanced.
4.7 Sessions
The previous subsections described the five between-subjects market formats and three
within-subject parameters sets designed for the experiment. I have completed 20 sessions
from May 2023 to October 2023. The session information can be found in Table 3. 168
subjects were recruited from the University of California, Santa Cruz (UCSC) Learning and
Experimental Economics Projects Laboratory (Leeps) via the Online Recruitment System
for Economic Experiments (ORSEE) (Greiner [2015]). The experiment is designed on the
oTree software (Chen et al. [2016]). The subjects earn points based on the results of one
randomly selected non-practice period. The average payment of the 75-minutes session is
approximately 22 US dollars, including a show-up payment of 5 US dollars. All experiments
are conducted onsite at Leeps Lab.
5 Results
Following the elimination of practice periods, the dataset encompasses 48 non-practice mar-
kets for the A2S2 market, 48 non-practice markets for the A2S2de market, and 48 non-
8
The endowment effect is a well-established phenomenon in behavioral economics (see Marzilli Ericson
and Fuster [2014] for an overview). Here, I discuss the endowment effect in the context of the valuation
paradigm (Kahneman et al. [1990]), rather than the exchange paradigm (Knetsch [1989]). Empirical evidence
suggests that the endowment effect can influence traders in stock markets (e.g., Furche and Johnstone [2006],
Anagol et al. [2018]).
9
Their model pertains to multi-attribute product scenarios, but it provides valuable insights applicable
to our asset pricing context.
23

practice markets for the A1S2 market. The call market dataset comprises 574 observations,
while the BDM market dataset comprises 947 observations.
Within the call market dataset, two instances of trading data have been excluded because
the subjects ran out of time and the system recorded their bids and asks as 0. While this
misreporting may potentially exert an influence on market prices, it is essential to emphasize
that the results in the call market section remain robust, irrespective of the presence or
absence of these two related trading periods.
In the context of the BDM market dataset, a total of 13 pieces of trading data have
been excluded due to instances where subjects ran out of time, and the system recorded
their decisions as 0. It is worth noting that the BDM market entails individual tasks, and
the removal of these data points has no bearing on the outcomes of other participants in the
experiment.
In the CDA markets, 20 asks exceeding a value of 300 have been removed from the
dataset. It is pertinent to mention that within this market, the maximum potential return
for one unit of the asset, in g90 , is capped at 190. Consequently, having exceptionally high ask
values that surpass this threshold does not contribute significantly to our market analysis.10
In the result section, I mainly compare the market price of the assets with their RE price,
which is 100 for both assets. In the paper, when I mention “overprice” or “underprice”, the
comparison is always between the actual price (may also be bid and ask) and the RE price.
5.1 BDM Market
Figure 3 lends empirical support to the salience theory within the context of the BDM
markets, as inferred from subjects’ bids and asks. In this figure, the average of subjects’ bids
and asks is employed as a proxy for the market price (hereafter referred to as ”mid”). The
analysis of average data across periods (as depicted in panel (a)) and cumulative distribution
functions (as illustrated in panel (b)) conspicuously reveals that bids and asks for Asset A
consistently surpass those for Asset B. On one hand, Asset A’s asks are evidently overvalued,
10
For instance, we have an ask of 999999 in the dataset, which I believe that the subject made the ask
just for fun.
24

and the bids for Asset B are undervalued. On the other hand, bids for Asset A and asks for
Asset B are closely centered around the RE price, which stands at 100.
Furthermore, the distribution over periods, as presented through box plots (depicted in
panel (c)-(e)), corroborates these consistent findings. Notably, the mispriced components
(the asks of Asset A and the bids of Asset B) exhibit a higher degree of dispersion, whereas
prices converging around the RE price (the bids of Asset A and the asks of Asset B) display
a higher degree of concentration.
As a robustness test, average bids and asks for each subject were also calculated, and
their distributions are portrayed through a box plot in panel (f). This supplementary anal-
ysis reaffirms the earlier findings, substantiating the consistency of mispricing both across
different periods and among individual subjects.
Hypothesis 1(a) finds empirical support in the experimental data. Nevertheless, it is

crucial to note that, given the absence of market interaction within the BDM market, it is
not advisable to directly employ it as direct evidence of the BGS model’s validity. Rather,
the BDM market serves as an indirect form of evidence, indicating that the model aligns
effectively with observed outcomes under individual investment scenarios. Additionally, Hy-
pothesis 3 is evidently validated within the figure, as the spreads for both assets are distinctly
larger than zero. This observation underscores the presence of significant spreads, affirming
the hypothesis.
The regression in Table 4 confirms most of what I have found in the figures. In the
regression (5), the baseline treatment is the BDM market under parameter set g80 . The
dependent yit is the bid, ask, mid price, and spread (ask - bid) of each asset in for subject i at
period t. “g70 ” and “g90 ” are treatment dummy variables for the parameter sets treatments.
“block” is the dummy variable for the transaction happened in the second block of the
session.
yit = β0 + β1 g70 i + β2 g90 i + β3 blocki + ϵit (5)
A noticeable finding is that the ask of Asset A is significantly above 100, while the bid
of Asset B is significantly below 100. Meanwhile, the bid of Asset A and the ask of Asset B
25

(a) trend overview. (b) prices cdf.
(c) mid over periods. (d) bid over periods.
(e) ask over periods. (f) prices by subjects.
Figure 3: The mid/bid/ask in the BDM task. “Mid” is defined as the average of an individual’s bid
and ask. Panel (a) shows the average mid/bid/ask over periods. Panel (b) shows the cumulative
distribution functions of the mid/bid/ask. Panel (c)-(e) show the distribution of the mid/bid/ask
over periods with box plots. Panel (f) shows the distributions of the subjects’ average bids and
asks.
are both around 100. The result indicates that the salient upside of Asset A mainly affects
the subjects’ willing to accept. Due to the potential high gain, the subjects increase the sell
price, but the potential gain does not affect the subjects’ willingness to pay. On the contrary,
the salient downside of Asset B mainly demotivate the subjects from buying so they submit
26

(1) (2) (3) (4) (5) (6) (7) (8)
Assets Asset A Asset B
Dependents mid bid ask spread mid bid ask spread
g70 -5.32*** -6.58*** -4.06** 2.52* 5.32*** 6.03*** 4.62*** -1.41
(1.253) (1.122) (1.631) (1.248) (1.269) (1.792) (0.978) (1.377)
g90 6.33*** 7.67*** 4.98*** -2.69* -3.89*** -0.28 -7.50*** -7.22***
(1.058) (0.930) (1.537) (1.409) (1.254) (1.715) (1.053) (1.346)
block -0.84 0.84 -2.53 -3.38** 1.09 3.44* -1.25 -4.69***
(1.438) (1.212) (1.908) (1.394) (1.239) (1.715) (1.161) (1.563)
Constant 16.46*** -2.10 35.02*** 37.12*** -18.31*** -38.44*** 1.82 40.27***
(2.461) (2.136) (3.391) (2.811) (2.195) (3.486) (1.651) (3.237)
Observations 947 947 947 947 947 947 947 947
R-squared 0.078 0.137 0.028 0.017 0.053 0.019 0.133 0.033
Table 4: BDM Regression summary. The baseline treatment is g80 . The price (bid/ask/mid)
here is the actual price - 100. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01. The regression is clustered at the
participant level.
a low average bid, but the downside does not affect the willingness to accept. Moreover, the
coefficients of the parameter sets dummies, in general, lend support to the BGS model. In
all three parameter sets, Asset A emerges as overvalued, while Asset B is consistently under-
valued. It is noteworthy that although the exact theoretical predictions may not perfectly
align with the empirical data, the overall trends uphold the model’s validity. Furthermore,
as depicted in columns (4) and (8), the average spread is significantly greater than zero,
substantiating the assertions of Hypothesis 3. Notably, the spread experiences a notable
reduction in Block 2, albeit the magnitude of this decrease remains relatively modest.
Table 5 presents a robustness check pertaining to the market price by transitioning the
bids and asks observed in the BDM markets into the call markets. This transformation
process involves grouping the bids and asks from the BDM market sessions according to
sessions and trading periods. Given the presence of four BDM sessions, each comprising 24
payment periods, a total of 96 “markets” are generated. Within each market, all asks are
arranged in a ascending order to construct a supply function, while all bids are arranged
in an descending order to create a demand function. The market price for each asset can
then be approximated by identifying the intersection point of the demand and supply curves,
27

which also corresponds to the median of all the bids and asks.
Table 5 further categorizes the market prices based on their relationship with the RE
price. The table clearly illustrates that in the majority of markets, Asset A is overpriced,
while Asset B is underpriced. The mean market prices also lend substantial support to the
presence of mispricing.
Assets total markets market price > 100 market price = 100 market price < 100 Mean market price
A 96 77 16 3 109.974***
B 96 2 6 88 89.125**
Table 5: The price distribution of the BDM markets when the market price is calculate by
the median of all the bids and asks. In total, we have 96 trading periods. The significance
in the last column shows whether the mean market price is significantly different from the
RE price. ∗ p<0.1; ∗∗
p<0.05; ∗∗∗
p<0.01.
Result 1. (a) Hypothesis 1(a) is supported by the data. The salient returns affect the bids
and the asks asymmetrically.
(b) Hypothesis 3 is supported by the data. The endowment effect exists, as the spread is
significantly larger than zero.
5.2 Call Market
Figure 4 presents the outcomes observed in the call markets, depicting subjects’ bids, asks,
and market prices. Following the integration of one-time market interactions and feedback
mechanisms between trading periods, it is evident that Asset A continues to be overvalued,
while Asset B remains undervalued, as discerned from the bids and asks submitted by par-
ticipants. Nevertheless, a noteworthy observation is that the bids and asks in the call market
approach greater proximity to the RE price when compared to the findings in the BDM mar-
ket in Figure 3. Specifically, bids and asks for Asset A exhibit a decline, whereas those for
Asset B witness an ascent. This observation is substantiated by an examination of average
data across periods (depicted in panel (d) and (e)), as well as individual player behavior
(illustrated in panel (f)). In panel (c), it is evident that the market prices within the call
markets consistently stay around the RE price for both Asset A and Asset B. Furthermore,
28

(c) market price over periods. (d) bid over periods.
(e) ask over periods. (f) prices by subjects.
Figure 4: The bid/ask/market price in the Call market. Panel (a) shows the average
bid/ask/market price over periods. Panel (b) shows the cumulative distribution functions of the
bid/ask/market price. Panel (c)-(e) show the distribution of the bid/ask/market price over periods
with box plots. Panel (f) shows the distributions of the subjects’ average bids and asks.
a parallel trend to the BDM market is observed, wherein the mispriced components (the
asks of Asset A and the bids of Asset B) exhibit greater dispersion compared to prices that
cluster around the RE price (the bids of Asset A and the asks of Asset B).
Table 6 presents the results of the regression analysis using equation (5) with the de-
pendent variables from the call markets. The findings corroborate the patterns observed in
29

(1) (2) (3) (4) (5) (6) (7) (8)
Dependents price bid ask spread price bid ask spread
g70 -3.09 -5.36** -6.91** -1.55 3.95 3.57 5.88** 2.31
(1.550) (1.331) (2.024) (0.900) (1.789) (2.665) (1.159) (1.959)
g90 3.17 7.16*** 2.37 -4.79* -2.43 -0.85 -6.45** -5.60*
(2.677) (1.068) (2.623) (1.865) (1.122) (1.478) (1.116) (2.234)
block -0.74 0.70 0.96 0.26 4.63* 5.31* 3.43 -1.88
(0.859) (2.454) (1.774) (1.795) (1.907) (1.943) (1.612) (1.022)
Constant 3.65 -5.18** 25.15*** 30.33*** -0.23 -21.06** 6.43** 27.48***
(2.212) (1.320) (1.060) (2.258) (2.019) (3.680) (1.478) (2.672)
Observations 574 574 574 574 574 574 574 574
R-squared 0.170 0.115 0.026 0.007 0.297 0.014 0.204 0.018
Table 6: Call market regression summary. The baseline treatment is g80 . The price
(bid/ask/market price) here is the actual price - 100. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01. The regression
is clustered at the session level.
Figure 4. Notably, when compared to the coefficients in Table 4, it becomes evident that
there is a consistent trend of decreasing prices for Asset A and increasing prices for Asset
B in the call markets. Furthermore, the results indicate that Asset A is slightly overpriced,
albeit insignificantly, as determined by its market price, while Asset B appears to closely
approximate RE price.
In summary, the dynamics observed in the bids and asks lend support to Hypotheses
1(b). However, the market price does not fully align with Hypothesis 1(b). The introduction
of market interaction does drive the market closer to the rational expectation equilibrium,
yet it is noteworthy that the salient payoffs still exert a discernible influence on asset prices.
Moreover, the analysis reveals that both the price and the bid for Asset B exhibit an
increase in Block 2. This upward trajectory of Asset B’s price, surpassing the RE price,
aligns with our findings in the CDA market, which will be discussed in more detail in the
subsequent subsection.
Result 2. Hypothesis 1(b) is supported by the bids and asks, but not by the market prices.
The market prices of both assets in the call market are close to the RE price.
30

5.3 CDA Markets
In this subsection, I compare the market outcomes across the A2S2 markets, the A2S2de
markets, and the A1S2 markets. Figure 5 offers a comprehensive overview of the market
dynamics. Panels (a) and (b) provide insights into how the average trade prices evolve
across the 12 payment periods (note that all the three market formats encompass 12 payment
periods) and depict cumulative distribution functions of these prices. In the A2S2 and the
A2S2de markets, Asset A appears to be overpriced relative to the RE price of 100. However,
it is notable that Asset B is also overpriced, with a market price surpassing that of Asset A.
This trend contradicts the predictions of the BGS model. Conversely, in the A1S2 market,
both Asset A and Asset B remain closely aligned with the RE price. When using the market
price from the A1S2 market as a baseline, instead of the RE price, it becomes evident that
both Asset A and Asset B are overvalued in the A2S2 market. Panels (c)-(h) of the figure
additionally underscore the consistency of market prices over the trading periods. For a
more detailed examination of the market trade price dynamics across all 12 market sessions,
please refer to Appendix B.
To enhance the robustness of the analysis, I calculate the average trade prices for each
subject and their trading volumes. Figure 6 portrays the distribution of subjects’ prices
across different markets (panel (a)), as well as the relationship between prices and total
trading volumes (panel (b)).
The patterns of mispricing in panel (a) consistently align with those observed in Figure
5, thereby indicating that the mispricing is not only consistent over periods but also among
subjects. Despite the variance in subjects’ pricing strategies, it is noteworthy that the
majority of participants tend to overvalue the assets, with the exception of Asset A in the
A1S2 market and in the A2S2de market. In addition, when comparing the outcomes between
the A2S2 and the A2S2de markets, it becomes evident that the players’ pricing strategies
exhibit more heterogeneity in the A2S2de markets. Furthermore, the subjects predominantly
set higher prices for Asset B than for Asset A across the three markets.
In terms of the relationship between trading volumes and average prices, as illustrated
in panel (b), the analysis does not support the hypothesis that subjects who engage in
higher trading volumes set asset prices differently from those who trade less. Specifically, for
31

(c) A2S2 Asset A box plot. (d) A2S2 Asset B box plot.
(e) A2S2de Asset A box plot. (f) A2S2de Asset B box plot.
(g) A1S2 Asset A box plot. (h) A1S2 Asset B box plot.
Figure 5: The trade prices in the CDA markets. Panels (a) and (b) show the average price over
periods and the cumulative distribution functions with two assets and two treatments. Panel (c)-
(h) show the distribution of the price by treatments respectively with box plots.
each asset within each market, the relationship between subjects’ average prices and their
trading volumes appears to be nearly horizontal. Although substantial disparities in trading
32

volumes exist among the subjects, with a few outliers, it is evident that individuals trading
assets at varying scales tend to adopt similar pricing strategies compared to the RE price.
Consequently, the market’s mispricing phenomenon, especially the mispricing in the A2S2
and the A2S2de markets, is not predominantly driven by a few subjects but rather emerges
as a collective market phenomenon.
(a) asset prices by subjects. (b) average price vs total volume.
Figure 6: The average trade prices in the CDA markets by the subjects. Panel (a) shows the
distribution of the average asset prices with a box plot. Panel (b) shows the relation between
subjects’ average asset prices and total trading volumes with a scatter plot.
The regression outcome in Table 7 confirms most of the findings in the figures. In
the equation (6), the baseline treatment is the A2S2 market under parameter set g80 . The
dependent yit is the trade price of each asset in market i at timestamp t. “A1S2”, “A2S2de”,
“g70 ”, and “g90 ” are treatment dummy variables for the single asset and the parameter sets
treatments. “dependent×g70 ” and “dependent×g90 ” are intersection terms of the A2S2de
and the parameter variables. “block” is the dummy variable for the transaction happened
in the second block of the session. “early” and “late” are the dummy variables for the
transaction happened in the first 30 seconds and in the last 30 seconds of each trading
period. Columns (1) and (2) in Table 7 use the difference between the trade price and the
RE price as the dependent variable. For columns (3)-(6), I first calculate the average spread
and total trading volume of each asset in each trading period. Then use them as dependent
variables in equation (6). Since the average data is calculated at the period level, the (yit , ϵit )
are replaced by (yi , ϵi ) and the “early” and “late” dummies are removed in columns (3)-(6).
33

yit = β0 + β1 A1S2i + β2 A2S2dei + β3 g70 i + β4 g90 i + β5 A2S2de × g70 i (6)
+β6 A2S2de × g90 i + β7 blocki + β8 earlyt + β9 latet + ϵit
(1) (2) (3) (4) (5) (6)

Dependent price spread volume
Assets A B A B A B
A1S2 -2.94 -8.59** -1.61 5.98 4.71** 5.46**
(2.147) (3.539) (2.669) (4.385) (1.809) (2.267)
A2S2de -1.57 -1.72 0.18 -1.60 -2.06*** -2.20***
(4.312) (2.616) (5.900) (4.391) (0.619) (0.619)
g70 2.00 5.12*** 3.84 6.19* -0.94 -1.06
(1.808) (1.363) (4.005) (3.321) (0.597) (0.689)
g90 4.79 -3.30 1.12 -0.70 -1.06 -1.00***
(3.308) (1.966) (1.319) (2.418) (1.040) (0.286)
dependent×g70 -3.58 -1.85 2.47 -4.90 1.31 1.70*
(2.426) (4.072) (6.221) (6.472) (0.790) (0.783)
dependent×g90 -0.93 2.58 0.68 0.92 0.81 1.20
(3.807) (2.280) (2.980) (4.224) (1.143) (0.759)
block -0.03 2.63*** -5.18** -1.67 0.40 -0.38
(1.225) (0.755) (1.953) (1.831) (0.336) (0.281)
early -2.93** -3.20**
(1.302) (1.122)
late 1.00 1.81*
(1.060) (1.004)
Constant 2.20* 8.09*** 16.14*** 12.62*** 6.30*** 6.07***
(1.094) (2.521) (2.050) (1.663) (0.326) (0.552)
Observations 764 707 120 119 120 119
R-squared 0.089 0.283 0.122 0.057 0.540 0.559
Table 7: CDA Regression summary. The baseline treatment is A2S2-g80 . The price here is the
actual price - 100. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01. The regression is clustered at the session level.
The regression analysis confirms several key findings. Concerning Asset A, the results
provide statistically significant support for the overpricing observed in the A2S2 market
34

when compared to the RE price or the price in the A1S2 market. However, the significance
is weak and the magnitude is minor and much below the prediction of the BGS model. The
prices of Asset A appear to be around the RE price in the other two CDA markets (A2S2de
and A1S2). Additionally, none of the parameter set dummies exhibit statistical significance.
Conversely, for Asset B, the analysis reveals that the price is in close proximity to the
RE price in the A1S2 market. In contrast, the price is significantly overvalued in the A2S2
market, particularly under the parameter set g70 . This observed overpricing of Asset B
contradicts the predictions of the BGS model and can be better explained by a tendency to
avoid the high probability of incurring losses, as explored in greater detail in the subsequent
section of the analysis. The coefficients in the A2S2de market similarly align with the
observed overpricing tendency.
The regression results indicate a slight increase in the prices of Asset B from block 1
to block 2. The timing of decisions within each trading period also appears to have an
impact on the prices. The market prices exhibit a characteristic pattern, with prices starting
at a lower level in the initial 30 seconds and subsequently increasing. This suggests that
subjects with a relatively lower evaluation of the assets tend to sell their assets early, while
participants with a higher evaluation or those engaged in speculative activities tend to raise
prices during later stages of the trading period.
The last four columns of Table 7 provide additional insights into market activities.
Columns (3) and (4) disclose relatively substantial spreads for both Asset A and Asset B.
Interestingly, the spread for Asset B is only marginally narrower than that of Asset A. These
results indicate that, on average, participants exhibit spreads of approximately 14 points
for both Asset A and Asset B. It is worth noting that the spreads observed in the CDA
markets are lower than those in the BDM markets and the call markets. This difference is
reasonable, given that subjects in the CDA markets engage in repeated exchanges of prices
and preferences. Such distinctions in spread between the market formats are also evident
when comparing the CDF curves.
Columns (5) and (6) reveal that trading activity is notably more robust for both assets
under the A1S2 market, with a lower level of activity observed for Asset B under parameter
set g90 . Nevertheless, it is important to emphasize that, overall, the market for both assets
demonstrates nearly equal levels of activity. However, it is worth noting that the level of
35

market activity varies across different market formats. The A2S2de market, characterized
by perfectly correlated states, exhibits lower market activity. In contrast, the A1S2 market,
with a higher market portfolio, experiences a higher level of market activity.
To conclude, Hypothesis 2 is supported by the data. But hypotheses 1(c) and 1(d) are
not. We can conclude the results as follows.
Result 3. Hypotheses 1(c) and 1(d) are not supported by the data. Asset A is only slightly
overpriced. However, Asset B is notably overpriced in these markets when compared to both
the RE price and the price of Asset A.
Result 4. Hypothesis 2 is supported by the data. Both the prices of Assets A and B are
close to the RE price.
5.4 Comparison Between Markets
In this subsection, I will provide a summary of the section by directly comparing the market
prices in the five market formats. To enable a fair comparison, I first calculate the average
bids, asks, and trade prices for each combination of sessions and non-practice trading periods.
It is important to note that there is only one market price in each trading period for the BDM
markets and the call markets. In total, there are 48 observations for each of the three CDA
markets, 96 observations for the BDM markets, and 72 observations for the call markets.
Figure 7 presents the distribution of prices through box plots, offering insights into
the relative pricing patterns across different market formats. For Asset A, a discernible
decreasing trend in market prices is evident from the BDM markets to markets featuring
player interactions (call and CDA). Asset A appears to be significantly overpriced in the
BDM markets, whereas it is only slightly overpriced in the call markets and the A2S2 CDA
markets. In the A1S2 and A2S2de CDA markets, the price of Asset A continues to decline,
eventually reaching a level close to the RE price. Conversely, for Asset B, an ascending trend
in market prices is observable, progressing from the BDM markets to the CDA markets. In
the BDM markets, Asset B is significantly underpriced. The price for Asset B returns to
the RE price in the call markets and the A1S2 markets, and further ascends significantly
above the RE price in the A2S2 and A2S2de markets. It is noteworthy that when comparing
prices between the A2S2 and the A2S2de markets, the state independence of assets does not
36

Figure 7: The average market prices of the four market formats. The prices are grouped at the
trading period level and the distributions are drawn by the box plots.
have a strong impact on market prices. This suggests that the level of state correlation or
independence does not play a substantial role in influencing asset pricing within this context.
It is important to emphasize that Figure 7 primarily provides a qualitative overview of

the pricing relationships between Assets A, B, and the RE price. While the figure offers
qualitative insights, it is essential to supplement these findings with quantitative analysis for
a more comprehensive assessment.
The relation between the asset prices and the RE price can be found in the previous three
subsections, while the relationship between the prices of the two assets is further examined in
Table 8. The table encompasses three panels, comparing the market prices between various
market formats: between the BDM and call markets (panel A), between the call markets
and the A1S2 markets (panel B), and between the call markets and the A2S2 markets (panel
C). The regression outcomes in the table substantiate the qualitative impressions derived
from Figure 7.
In addition to the previously observed trends, the table also provides insights into how
bids and asks change across different markets. Firstly, when comparing the bids and asks
in the BDM markets to those in the call markets, it is evident that they tend to shift closer
to rational expectations. This shift entails an increase in bids and asks for Asset B and a
decrease in asks for Asset A. Consequently, the market price in the call markets progressively
37

(1) (2) (3) (4) (5) (6)
Dependents price bid ask price bid ask
Panel A: BDM (baseline) vs Call
Call -6.67** -2.01 -8.61*** 13.48*** 17.91*** 8.44***
(2.160) (2.088) (1.221) (2.634) (3.934) (1.983)
···
Constant 9.03*** -4.12*** 32.34*** -13.23*** -39.65*** -1.16
(1.810) (0.969) (0.882) (2.780) (3.341) (2.067)
Observations 168 168 168 168 168 168
Panel B: Call (baseline) vs A1S2
A1S2 -5.06 -4.42 -22.78*** -0.53 5.70 -2.94
(3.248) (4.067) (2.589) (3.317) (5.395) (2.757)
···
Constant 3.41 -6.20** 24.79*** 0.15 -20.76*** 6.40***
(2.209) (2.127) (0.900) (1.922) (3.538) (1.210)
Observations 96 96 96 96 96 96
Panel C: Call (baseline) vs A2S2
A2S2 1.79 2.52 -10.53*** 6.59** 19.02*** 7.26**
(2.219) (2.376) (1.743) (2.530) (3.178) (2.639)
···
Constant 2.49 -5.42** 24.42*** 0.48 -20.24*** 6.45***
(2.194) (1.937) (1.535) (1.953) (3.305) (1.513)
Observations 120 120 120 120 120 120
Table 8: Regression that compares the prices among market formats. The price here is the
actual price - 100. The block and parameter dummies are included in the regression but not
∗ ∗∗ ∗∗∗
displayed in the table. p<0.1; p<0.05; p<0.01. The regressions are clustered at the
session level.
moves toward the RE price.
Secondly, although the market prices between the call markets and the A1S2 markets
exhibit minor differences, Asset A experiences a notable reduction in asks in the A1S2
markets (also in the A2S2 markets). This observation suggests that the allure of the salient
38

upside becomes less compelling in the CDA market setting.
Thirdly, in comparison to the bids and asks in the call markets, both the bids and asks
for Asset B register significant increases in the A2S2 markets. This upward trend leads to
Asset B being overpriced in the A2S2 markets. The comparison among market formats can
be summarized as below.
Result 5. (a) For Asset A, there is an decreasing trend of market prices from the BDM
market to the markets with actual trades. For Asset B, the trend is the opposite.
(b) Compared to the prices in the BDM markets, the bids, asks and the market prices in the
call markets move towards the RE price.
(c) Compared to the prices in the call markets, the asks of Asset A decrease in the CDA
markets. In addition, both the bids and asks of Asset B increase above the RE price in the
A2S2 markets.
6 Discussion
6.1 Market Mechanisms
In the preceding section, we examined the experimental results alongside the performance
of the BGS model. The model demonstrates its capacity to effectively predict asset pricing
in the BDM markets and, to some extent, the bids and asks in the call markets. However, it
is worth noting that the model exhibits a certain asymmetry in its impact on bids and asks,
wherein the low-probability salient upside predominantly influences the ask price of Asset A,
while the low-probability salient downside predominantly influences the bid price of Asset B.
Nonetheless, it is evident that the salience theory predicts poorly in the CDA market. In the
A2S2 markets, Asset A is only slightly overpriced, while Asset B is significantly overpriced
in the majority of markets. The prices of both assets in the A2S2de markets are slightly
lower than the prices in the A2S2 markets, but the mispricing tendency persists. In the
A1S2 single asset markets and the call markets, both assets closely adhere to the RE price,
indicating that market dynamics significantly deviate from the salience theory’s predictions.
Comparing the results in the BDM markets, the call markets, and the CDA markets,
39

several possible explanations of the mispricing can be ruled out. Firstly, based on the out-
comes from the A1S2 market, it appears unlikely that subjects are influenced by theoretical
models related to absolute asset characteristics, such as cumulative prospect theory (which
employs an inverse S-shaped probability weighting function), skewness preference, and regret
theory.11
Secondly, due to the inconsistencies observed among markets and the utilization of
randomized sampling, individual characteristics like risk aversion, loss aversion, the hot hand
fallacy, and the gambler’s fallacy are unlikely to be the driving factors behind the market
outcomes.12
Thirdly, although the assets converge to the RE price in two market formats, there is
little evidence to suggest substantial learning over trading periods. The sole exception is
the increasing trend in the price of Asset B in the call market. This trend may indicate a
potential overpricing of Asset B in the call market, but, in general, asset pricing remains
relatively stable over time.
Furthermore, classic capital asset pricing model does not offer accurate predictions for
the outcomes of my experiment. Firstly, in the BDM markets and the A2S2 markets, the
two assets are priced differently. In contrast, the CAPM model predicts identical asset prices
due to the presence of the same market portfolio, the same asset characteristics (mean and
variance), and the same market traders. Secondly, the results from my experiment diverge
from those reported in Bossaerts et al. [2007]. In their study, a consistent underpricing of
the assets was observed. Thirdly, the relation between the market prices in the A2S2 and
the A2S2de markets is not aligned with the theoretical prediction.
So what may affect the market prices? Comparing the results in the BDM market and
the call market, we can find that the primary forces driving market prices closer to the RE
price are the market interaction and feedback. Despite the fact that subjects interact only
once in each trading period, this interaction plays a pivotal role in bringing the bids and
11
It is worth noting that while there are asset pricing models rooted in regret theory, the original regret
theory proposed by Loomes and Sugden [1982] has been shown to be a special case of the salience theory
(Herweg and Müller [2021]). I have not encountered asset pricing models that are directly based on the
general regret theory as presented in Loomes and Sugden [1987].
12
Additional details are provided in Appendix C.
40

asks closer to a shared consensus, which appears to be the RE price. While mispricing and
the salience effect continue to exert influence, the market dynamics converge to a middle
ground around the RE price due to the presence of market interaction and feedback. An
alternative way to interpret the difference between the two market formats lies in whether
the market price is endogenously determined. In the BDM market, traders can be viewed as
price takers, assuming that the market price is exogenously set and unaffected by individual
traders’ decisions. On the other hand, the call market operates on more game theoretical
principles, where subjects can exert a marginal impact on the market price through their
decisions, and the market price is determined endogenously based on these interactions.
The overpricing of Asset B in the A2S2 and the A2S2de markets could be influenced by
several factors. Firstly, when comparing the two markets to the call markets, it’s important to
note that the two markets involve more frequent market interactions and feedback exchanges
within trading periods. The traders are also not restricted to trade only one unit of each
asset in the CDA markets. These differences might lead to different price dynamics due to
the increased level of trading activity and information exchange. Secondly, in comparison
to the A1S2 markets, the A2S2 and the A2S2de markets introduce two assets, which could
potentially impact the relative pricing between the assets. The presence of multiple assets
can lead to complex interactions, where traders may weigh one asset against the other when
determining their values.
The prices of Asset B in the experiment exhibit similarities to the findings of Huber
et al. [2019] and Zeisberger [2022], who discovered that investors tend to pay more attention
to the high probability of incurring losses rather than the magnitude of loss with a low
probability. This behavior aligns with the expected utility-safety first rule (Levy and Levy
[2009]). According to this rule, traders tend to have a preference for outcomes in which
the payoff does not fall below a certain disaster level. If this disaster level is set around
the RE price at 100, the theory could explain why individuals favor Asset B over Asset A.
Asset B carries a lower probability of falling below the RE return, making it a safer choice.
Consequently, the theory provides a framework for understanding the relative pricing of the
two assets and why they initially exhibit different valuations, aligning with the trends in the
experimental data. It is possible that subjects are overpricing Asset B due to their aversion
to the low probability of experiencing losses.
41

However, the aversion to losses does not fully explain the misprcing in my experiment.
Firstly, it is clear that the overpricing in my experiment is driven by the relative comparison
between the two assets, as Asset B is not significantly overpriced in the A1S2 markets. This
suggests that the expected utility-safety first rule, which is based on the absolute character-
istics of assets, does not fully account for the observed pricing dynamics. Secondly, while
individual pricing strategies influenced by aversion to high probabilities of losses could be
expected to perform consistently across market formats, this is not the case in the BDM
markets and the call markets. The A2S2 markets, with their frequent interactions, unre-
stricted trading activities, and multi-asset context, appear to trigger this aversion to high
probabilities of losses, but the exact mechanism driving this phenomenon warrants further
study.
Result 6. (a) The market interaction and feedback bring the bids, the asks, and the market
prices towards the RE price.
(b) Under frequent market interactions and relative comparison between assets, the subjects
show aversion to the high probabilities of losses.
6.2 Portfolios and Diversification in CDA Markets
Another possible influential factor in the CDA markets is portfolio buildings and diversifica-
tion, which has been widely discussed in the finance literature but has not been considered
in the BGS model. In this section we check this possibility by examining the subjects’ asset
holdings in the CDA markets.
Table 9 shows the fractions of players (each player represents a subject in a trading
period) that are classified by their purchase behavior of the two assets in the three CDA
markets. The six columns are separated by market formats and the subjects’ initial endowed
assets. Recall that half of the subjects own 2 units of Asset A and the other half own 2
units of Asset B in the A2S2 and the A2S2de markets, while all the subjects own 2 units of
either Asset A or Asset B in the A1S2 markets. The first three rows “sell Asset A”, “buy
Asset A” and “keep Asset A” are defined when the subjects’ final Asset A holding is lower
than, higher than, or equal to their initial endowment of Asset A, respectively. Likewise, the
three rows for Asset B are defined in the same manner. Based on the definition, the players
42

who own one asset in the A2S2 and the A2S2de markets cannot “sell the other asset” since
their initial endowment of the other asset is 0. Similarly, the players in the A1S2 markets
cannot interact with the asset that is not in the market. To focus on the asset holdings,
the analysis here does not distinguish the motivations of holding the assets, such as value
investing, hedging, and speculations. In column (1), “keep Asset B” means that players do
not buy Asset B at the end of the game since their initial endowment of Asset B is 0. This
works similarly for “keep Asset A” in column (2).
The data in columns (1) and (2) of the table indicate that a significant portion of players
opt to sell their initial endowments, with approximately 70% of players selling Asset A and
roughly 60% selling Asset B in the A2S2 markets. Interestingly, players holding Asset B are
slightly more inclined to retain their initial asset compared to those holding Asset A. The
data in columns (5) and (6) shows a similar pattern, though the asymmetry between the two
assets is lower than that in the first two columns.
Conversely, columns (3) and (4) reveal a different pattern when only one asset is present
in the market. In this scenario, fewer subjects choose to sell their endowments, and it appears
that the trading activity in the A1S2 market primarily involves the exchange of preferences
rather than the acquisition of additional assets.
One intriguing question to consider is whether players sell their initial endowments to
diversify their portfolio by acquiring the other asset. The data suggest that players who
initially own Asset A are less inclined to diversify their portfolio by purchasing Asset B,
with fewer than half of them choosing to do so. Conversely, those who initially own Asset
B demonstrate a stronger preference for acquiring Asset A. This asymmetry in the table
implies that players initially value the two assets differently, which aligns with the findings
from the previous subsection regarding the mispricing of the assets.
Figures 8 and 9 further examines the observed puzzles. The histograms presented in
panels (a) and (b) display the distributions of asset purchases, while panel (c) depicts the
distribution of the difference in final asset holdings (Asset A holding - Asset B holding),
conditional on the initial asset endowments in the A2S2 and the A2S2de markets. The red
and blue bars continue to represent Assets A and B, respectively, while the purple bars
represent the overlapping of the two distributions.
43

(1) (2) (3) (4) (5) (6)
Market A2S2 A1S2 A2S2de
Endowed Asset A*2 B*2 A*2 B*2 A*2 B*2
sell asset A 0.70 - 0.47 - 0.60 -
buy asset A 0.14 0.61 0.37 - 0.12 0.53
keep asset A 0.16 0.39 0.16 - 0.28 0.47
sell asset B - 0.60 - 0.45 - 0.55
buy asset B 0.44 0.15 - 0.41 0.49 0.16
keep asset B 0.56 0.24 - 0.14 0.51 0.30
Table 9: Traders’ asset trading conditional on initial asset holdings. The columns are divided by
the three markets and whether the subjects start with 2 assets A or 2 assets B. In the A1S2 market,
the subjects can only trade one asset in each period.
(a) asset holding if initially own Asset A. (b) asset holding if initially own Asset B.
(c) Asset A - Asset B holdings.
Figure 8: Asset purchases conditional on initial asset holdings in the A2S2 market. The purple
parts of the histograms are the overlapping between the Asset A related frequencies (red) and the
Asset B related frequencies (blue).
44

(a) asset holding if initially own Asset A. (b) asset holding if initially own Asset B.
(c) Asset A - Asset B holdings.
Figure 9: Asset purchases conditional on initial asset holdings in the A2S2de market. The purple
parts of the histograms are the overlapping between the Asset A related frequencies (red) and the
Asset B related frequencies (blue).
These findings reinforce the patterns identified in the previous table. On one hand,
players who initially possess Asset A are inclined to sell one or both of these assets, but they
are unlikely to purchase Asset B for diversification purposes. On the other hand, players
who initially hold Asset B show a distinct preference for exchanging Asset B for Asset A.
Moreover, a greater number of players opt to retain their initial Asset B compared to those
who retain their initial Asset A. This analysis provides additional support for the notion
that players value Assets A and B differently, shedding light on the mispricing observed in
the A2S2 and the A2S2de markets.
The histogram in panel (c) provides further insights into the distribution of asset holdings
in the A2S2 and the A2S2de markets. It illustrates that maintaining a 1:1 ratio of the two
assets (where the difference is 0) is the most common choice among players, accounting for
approximately 30% of cases (including players who sell all their assets). This rate increases
to approximately 70% when we also consider asset holding differences of -1 and +1. Most of
45

the asset holding differences are concentrated around -1, 0, and 1. The subjects who initially
own one asset are slightly more likely to retain a greater proportion of that asset compared
to the other.
Moreover, when comparing the two figures, it becomes evident that while the asymmetry
between the two assets is present in both the A2S2 and the A2S2de markets, this asymmetry
is weaker in the latter. In the A2S2de market, participants are more inclined to diversify
their investments. This observation is not unexpected, as in the A2S2de markets, the states
of the two assets are perfectly correlated, allowing participants to construct portfolios with
a guaranteed safe return.
To provide a more detailed breakdown of these asset holding combinations, the readers
can refer to Tables 14 and 15 in Appendix D, which lists all the possible combinations of
final asset holdings observed in the A2S2 and the A2S2de markets. The table highlights that
a majority of players choose to sell one asset for cash, purchase the other asset, or maintain
a balanced 1:1 distribution between the two assets, providing further context to the asset
holding patterns in the experiment.
The results presented in this section highlight the role of portfolio building and diver-
sification as motivating factors in market trading. However, it is essential to recognize that
diversification alone cannot fully explain the mispricing puzzle. Moreover, based on the ev-
idence in this section, it appears that the diversification of asset allocation is more likely a
consequence of the mispricing, rather than its root cause. The observed asymmetry in di-
versification between the two assets is less likely to occur if players initially consider Assets
A and B to have equal initial values. A more promising explanation is that the subjects
underprice Asset A and overprice Asset B initially, which establishes the initial prices for
the two assets. These initial price dynamics, in turn, motivate the diversification observed
in the market as players seek to capitalize on the pricing differentials.
Result 7. (a) In the A2S2 and the A2S2de markets, diversification is one factor that mo-
tivates the market trade. However, it acts as a consequence of the mispricing instead of its
explanation.
(b) The subjects are more likely to diversify when the states of the assets are perfectly corre-
lated.
46

7 Conclusion
In our study, we put the predictions of Bordalo et al. [2013b] to the test in CDA markets,
call markets, and BDM individual investment tasks. The findings of our research provide
valuable insights: the salience theory finds support in the BDM markets, receives partial
support in the call markets, but does not align with the dynamics observed in the CDA
markets.
In the individual investment BDM markets, subjects exhibit a susceptibility to the salient
payoffs of the assets, leading to the mispricing of assets in accordance with the predictions
of the salience theory. However, the introduction of market interaction and feedback in the
call markets serves to mitigate the impact of the salience payoff on asset prices, moving them
closer to rational expectations. Consequently, the salience effect becomes weaker under these
conditions.
When subjected to frequent interactions, the subjects demonstrate an aversion to the

relative high probability of losses. This aversion pushes the price of Asset B even beyond
the rational expectations. These observations shed light on the intricate interplay between
salience, market interaction, and investor behavior in different market formats.
The results and discussions presented in this study offer valuable insights that suggest
potential directions for advancing the salience theory. Two key aspects are worth considering:
Firstly, it is possible that participants do not solely focus on the salient payoff but may
also exhibit biases in how they weigh the salient probabilities. The evidence derived from
the A2S2 markets implies that subjects might overprice Asset B because it offers a high
probability of achieving a positive, medium-high payoff. Conversely, the salience of the high
payoff associated with Asset A may be diminished by its low probability of occurrence. This
suggests that future research could delve deeper into how individuals process and weigh the
salient probabilities in their decision-making, contributing to a more nuanced understanding
of salience effects.
Secondly, the salience theory appears to perform well in individual decision tasks but
exhibits fragility when market interactions come into play. In the BDM market, subjects are
capable of paying attention to the salient payoffs, albeit with partial impact on their pricing
47

decisions, influencing either their bids (downside salience) or their asks (upside salience).
However, the subjects in market sessions seem to consider various other attributes of the
assets. This raises the possibility for future research to refine the salience theory, particu-
larly concerning its applicability in market contexts, and investigate the interplay between
salience and other factors influencing decision-making in market settings. These potential
research avenues can contribute to a more comprehensive understanding of the salience the-
ory’s applicability and its interaction with various decision-making processes.
Thirdly, gains and losses can be perceived differently depending on the market formats.
The perceived purchasing prices, return potential, gains, and losses may vary between market
formats. It would be intriguing to explore how these variables are subjectively perceived from
the subjects’ perspective and examine their correlation with individual risk perceptions, akin
to the approach taken by Huber et al. [2019].
The experimental findings in this study also offer a plausible explanation for the mixed
empirical evidence found in research that tests the salience theory with stock market data.
In the BDM market, the setup closely simulates real-world circumstances where traders
perceive market prices as exogenous, random, and have few interactions with other traders.
This setting aligns with the assumptions of the salience theory and, as shown in the study,
can lead to outcomes that are consistent with the theoretical predictions. On the other
hand, the call and CDA markets simulate scenarios where traders actively exchange their
preferences and engage in influencing market outcomes through their interactions. This
distinction in market environments, and the varying degrees to which traders are exposed
to salience effects, may explain why the salience theory seems to interpret data effectively
in some markets while falling short in others. It underscores the importance of considering
the specific context and market dynamics when analyzing the applicability of the salience
theory in real-world stock markets.
48

8 Acknowledgements
I gratefully acknowledge funding for this project from Early Career Grants at Institute for
Advanced Economic Research, Dongbei University of Finance and Economics. For very
helpful comments and feedback I am indebted to Daniel Friedman, Steven Gjerstad, David
Porters, Jean Paul Rabanal, Olya Rud, Gerelt Tserenjigmid, Kristian Lopez Vargas, Brett
Williams, Zhaoqi Wang, Stefan Zeisberger, Dongming Zhu and participants in 2023 ESA
World meeting at Lyon, in 2023 ESA North American meeting at Charlotte, in Economics
Science Institute at Chapman University, and in University of California Santa Cruz exper-
imental workshop.
49

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57

A Alternative predictions
A.1 BGS predictions by parameters sets
Reference Correlation g80 g70 g90

Asset A price
Other asset independent 106.3 99.5 103.7
Other asset correlated 106.3 108.0 103.7
Market avg independent 98.2 96.7 103.7
Market avg correlated 106.3 108.0 103.7
Asset B price
Other asset independent 86.2 86.8 91.5
Other asset correlated 93.4 92.0 96.3
Market avg independent 86.2 86.8 91.5
Market avg correlated 93.7 92.0 96.3
Table 10: Predicted asset prices under the three sets of parameters. The RE price is 100.
Two major factors affect the asset pricing in the BGS model: the correlation of the
states of assets and the salience reference (σ in the model). In Bordalo et al. [2013b], the
reference line that determines the salience of the return xjs is the market average at state s
(Here xs = 100, ∀s = 1, 2). However, since there are only two assets in our experiment, the
subjects may also follow Bordalo et al. [2012b] and use the return of the other asset as the
reference. Another issue in Bordalo et al. [2013b] is that the state of the assets are perfectly
correlated. However, it creates hedging opportunities and also differs from the independent
assumption in Bordalo et al. [2012b].
To further expand the predictions under the three parameters sets in Table 2, I consider
the following four cases. The reference line can be the market average or the other asset. The
states of assets can be perfectly correlated (so two assets) or independent (so 2 × 2 possible
joint states). Table 10 shows the theoretical predictions under the four cases and the three
parameters sets. Asset B is always underpriced below the RE price in three parameter sets.
The price for Asset A is complicated. If we follow the dependence assumption (row 2 and
58

4), Asset A should be overpriced under all the parameter sets. If we follow Bordalo et al.
[2013b] but consider the states of the assets to be independent (row 3), Asset A is only
overpriced under g90 . If we follow Bordalo et al. [2012b] (row 1), Asset A is overpriced
under g80 and g90 . Overall, though the pricing of Asset A is not consistent across possible
references and correlation structures, the predictions of Asset B should be quite consistent.
Our experimental results in the BDM markets satisfy the predictions, but the results in the
CDA markets are not aligned with the BGS model.
A.2 Cumulative prospect theory and skewness preference
In my experiment, I set up the two assets so they have the same mean, the same variance,
the same kurtosis (fourth standardized central moment), but the opposite skewness (third
standardized central moment). Table 11 shows the detailed information for each asset under
the three parameters sets. There are several evidence from the literature that the subjects
may overprice positively skewed assets and underprice negatively skewed assets (Straznicka
and Weber [2011]; Huber et al. [2014]; Brünner et al. [2011]), which is aligned with the
prediction of the BGS model (Dertwinkel-Kalt and Köster [2020]) but without the existence
of other assets in the market.
g80 g70 g90

Mean 100 100 100
Variance 1600 2100 900
Skewness ±1.5 ±0.87 ±2.67
Kurtosis 3.25 1.76 8.11
Table 11: The mean, variance, skewness and kurtosis for the assets under the three parameters
sets. Under each parameters sets, assets A and B share the same mean, the same variance, the
same kurtosis, and the opposite skewness. Asset A is always positively skewed while Asset B is
negatively skewed.
The cumulative prospect theory under the current parameters sets provide the same
prediction (Tversky and Kahneman [1992]; Barberis and Huang [2008]; Barberis et al. [2016]).
Here I use the classic cumulative prospect theory model as follows. The traders face the asset
59

of (x−m , p−m ; ...; x−1 , p−1 ; x0 , p0 ; x1 , p1 ; ...; xn , pn ). The returns and the states are ranking in
an ascending order (xi ≤ xj , ∀i < j). The expected return of the asset is calculated as
n
X
πi v(xi ) (7)
i=−m
The subjective probability weighting function πi is


w+ (pi + ... + pn ) − w+ (pi+1 + ... + pn )

for 0 ≤ i ≤ n
πi = (8)
w− (p−m + ... + pi ) − w− (p−m + ... + pi−1 ) for −m ≤ i < 0

Pγ
w+ (P ) = (9)
(P γ + (1 − P )γ )1/γ
Pδ
w− (P ) = (10)
(P δ + (1 − P )δ )1/δ
The value function v(x) is


x α

for x ≥ 0
v(x) = (11)
−λ(−x)α

for x < 0
Using the classic parameters of λ = 2.25, γ = 0.61 and δ = 0.69. We set α = 1 instead
of 0.88 in the classic design so that the prediction from the cumulative prospect theory is
comparable to that of the BGS model under the same risk-neutrality assumption. Table 12
shows the prediction from the cumulative prospect theory. We can see that both the skewness
preference and the cumulative prospect theory supports the BGS model when there is only
one asset in the market. However, the experimental results deviates from the prediction,
since the trade prices in the A1S2 markets are close to the RE price.
g80 g70 g90

Asset A 106.08 101.84 108.63
Asset B 80.74 83.38 81.17
Table 12: The prediction of the cumulative prospect theory under the risk-neutrality assumption.
60

A.3 Capital asset pricing predictions
We consider the classic asset pricing model in which the asset price is determined by the
following formula (Bossaerts et al. [2007]).
I
1 X 1 −1
p=µ−( ) ∆m (12)
I i=1 bi
where µ is the expected return of the asset, I is the total number of traders, bi is the
level of absolute risk aversion for trade i, ∆ is the covariance matrix of the asset, and m is
the market portfolios of risky assets per capita (m = 1 for all treatments in my experiment).
Our asset payoff structure in Table 1 controls for the covariance of the assets: when the
states of the assets are perfectly correlated, we have var(A) = var(B) = −cov(A, B). As
a result, both assets A and B have an asset price equal to µ (the RE price) regardless of
the market aggregate risk aversion when the states of the assets are perfectly correlated.
When the states of the assets are independent, cov(A, B) = 0. In this case, the price of
the assets only depends on its mean, variance, and the market aggregate risk aversion. The
traders overprice assets when they are risk loving, and underprice assets when they are risk
averse. Since the two assets A and B have the same mean and variance, a trader with a
mean-variance utility functions value the two assets equally.
The capital asset pricing model provides no accurate predictions for my experiment. On
one hand, the two assets are priced differently in the BDM markets and in the CDA markets,
while the CAPM model predict the same asset prices due to the same market portfolio, the
same asset characteristics, and the same market traders. On the other hand, my experimental
results differ from Bossaerts et al. [2007], as they found a consistent underpricing of the assets.
However, it is possible that the model affects the market prices conditional on the initial
mispricing of the assets. The results in Section 6 shows that a fraction of subjects are
diversifying between the two assets, which may affect how the market prices are made.
61

A.4 Expected utility-safety first rule
Some recent evidence (Huber et al. [2019]; Zeisberger [2022]; Holzmeister et al. [2020]; Cao
et al. [2023]) shows that the investors pay more attention to the probability of losses and
assets with higher average perceived riskiness are traded at significantly lower prices. Such
a mispricing is supported by the expected utility-safety first rule (Levy and Levy [2009]),
in which the traders have a discrete utility decrease when the return is below a disaster
threshold.

U (x) − k

for x < d
USF (x) = (13)
U (x) for x ≥ d

Combining this utility function with the expected utility theory or prospect theory, Levy
and Levy [2009] propose that the traders tend to underprice the assets with a high probability
of losing, which is Asset A in our experiment if we set the disaster level around the RE price.
That is, the subjects underprice Asset A and overprice Asset B because they are averse to
the high probability of losing below the rational expected (also the return of cash holding).
Our relative mispricing between the two assets in the A2S2 and the A2S2de market is aligned
with the individual lottery selections in Levy and Levy [2009] and Zeisberger [2022], and the
market outcomes in Huber et al. [2019].
However, the aversion to losses does not fully explain the misprcing in my experiment.
Firstly, the expected utility-safety first rule is still based on the asset absolute characteristics.
But the overpricing should be caused by the relative comparison between the two assets since
Asset B is not significantly overpriced in the A1S2 markets. Secondly, as individual pricing
strategies, the aversion to losses should also work well in the BDM market and in the call
market, which is not true in my experiment.
A.5 S-shape probability weighting function
Figure 10 draws some theoretical predictions with a S-shape probability weighting function
πa
ω(π) = π a +(1−π)a
. In the figure, I range the parameter a from 1 to 2. When a = 1, the
probability is not shaped with ω(π) = π. The red and blue colors still refers to the price
of Asset A and B respectively. With the solid line, we simply calculate the asset price as
62

pi = ω(π1 )xi1 + ω(π2 )xi2 , i = A, B. With the dashed line, I replace the (π1 , π2 ) in the
model section of the salience theory to (ω(π1 ), ω(π2 )) with the S-shape probability weighting
function.
Figure 10: Theoretical prediction under S-shape probability weighting function under parameter
set g80 . X-axis refers to a in the probability weighting function. Y-axis refers to the predicted asset
prices. The predictions for parameters g70 and g90 follow the same pattern.
Figure 10 provides predictions on the mispricing puzzle. The solids lines explain why
the subjects may misprice in the A1S2 market. The two solid lines show that Asset A is
underpriced and Asset B is overpriced under the S-shape probability weighting function.
The dashed lines explain theoretically how the new probability weighting function affect
the prediction of the salience theory: Asset A is first overpriced then gradually becomes
underpriced, while Asset B is first underpriced but gradually becomes overpriced.
However, the puzzle is not solved. For Asset A, it is around the RE price in both CDA
markets. For Asset B, it is overpriced in the A2S2 and the A2S2de markets but is not in
the A1S2 markets. In the figure, the blue dashed line is below the blue solid line, but should
be above it by the data. The red lines tend to be below the RE price, but should be close
to it. The S-shape probability weighting function cannot solve the mispricing puzzle in the
experiment.
63

B The dynamics for each CDA market
In this section, I present the market dynamics in all the 96 non-practice markets. Figures
11-14 shows the 48 non-practice markets in the A2S2 market, Figures 15-18 show the 48 non-
practice markets in the A1S2 market, and Figures 19-22 show the 48 non-practice markets
in the A2S2de market. The figures serve as a supplementary material of the aggregate data
I have presented in the main text. Except for a few outliers, the market dynamics are overall
consistent with the aggregate result I have shown.
In the A2S2 markets, Asset B is overpriced in most of the markets, which contradicts
the prediction of the salience theory. The figure also shows heterogeneity for Asset A. We
can observe that Asset A is not always underpriced or close to RE price. In a few markets
(e.g., Figure 11 panel (e)) the trade price is above 100. The slight significance between the
RE price and the average price of Asset A in the regression is not resulted from the fact that
the price of Asset A is always close at the RE price, but from the fact that the price of asset
fluctuates around the RE price. It shows that salience theory can successfully predict the
price of Asset A in some markets, but it apparently cannot describe the overall trend of the
price of Asset A.
The market dynamics in the A2S2de markets exhibit similarities to those observed in
the A2S2 markets. Furthermore, there are more fluctuations in the prices of Asset A among
markets in the A2S2de market, consistent with the findings discussed in the main text.
In the A1S2 markets, we can also observe that the price fluctuation is less than that
in the A2S2 markets. The prices of both assets are close to the RE price, while Asset A is
slightly underpriced and Asset B is slightly overpriced.
64

(a) period 4 (b) period 5 (c) period 6 (d) period 7
(e) period 8 (f) period 9 (g) period 10 (h) period 11
(i) period 12 (j) period 13 (k) period 14 (l) period 15
Figure 11: Market dynamics A2S2 session 1. The line charts shows how the trade price moves
over time in each period. Red refers to Asset A and blue refers to Asset B.
65

66

67

68

69

70

71

72

Figure 19: Market dynamics A2S2de session 1. The line charts shows how the trade price moves
73

74

75

76

C Mispricing in the CDA market: other explanations
In the section, I continue to explore the puzzle of mispricing in the CDA markets and will rule
out several possible explanations. Firstly, risk preference may affect the investment behavior.
Risk averse subjects will reduce the price below the RE price, and risk loving subjects will
submit a higher price above the RE price. Following this idea, the market outcome indicates
that players may be risk-averse with Asset A, and risk-loving with Asset B. However, the
subjects are unlikely to behave as risk-averse and risk-loving simultaneously and thus risk
preference cannot consistently explain the mispricing of the two assets. Furthermore, the
risk preference cannot be combined with salience theory since the lower price of Asset A
compared to the price of Asset B already contradicts the prediction of the salience theory.
Secondly, since state 2 has a much higher probability than the probability of state 1 (π2 ≥
0.7, ∀ parameter sets), it is likely that subjects observe a series of state 2 consecutively and
are affected by the hot hand fallacy. In this case, the subjects overestimate the probability
of state 2. The subjects could also be affected by the gambler’s fallacy and overestimate
the probability of state 1. To examine how the states of the assets in the previous periods
affect the pricing in the current period, I run the following regressions (14) with trade price
as dependent variables. “LXs” are the dummy variables and equal to 1 if state 2 happened
in the previous X period so we can observe how the state of the assets in the past periods
affect the asset price in the current period.
yit = β0 + β1 A1S2i + β2 A2S2dei + β3 g70 i + β4 g90 i + β5 A2S2de × g70 i (14)

+β6 A2S2de × g90 i + β7 blocki + β8 earlyt + β9 latet
+β10 L1s + β11 L2s + β12 L3s + ϵit
Table 13 shows regression outcomes. For the L1s term, the price of Asset A increases and
the price of Asset B decreases when the state changes from 1 to 2. Since state 2 is the “bad”
state for Asset A and the “good” state for Asset B, the result is consistent with the gambler’s
fallacy. The result also holds for both the L2s terms and the L3s terms. However, none of the
coefficients are statistically significant and the magnitudes are small. Furthermore, Table 7
already shows that the learning between blocks is weak, so the subjects do not “learn” and
77

change their behavior from the previous realized states. Overall, the overpricing of Asset B
is not mainly affected by either the hot hand fallacy or the gambler’s fallacy.
(1) (2) (3) (4) (5) (6)

Assets A B A B A B
A1S2 -3.22 -8.72** -3.60 -8.85** -3.25 -8.69**
(2.188) (3.763) (2.571) (3.791) (2.413) (3.843)
A2S2de -1.53 -1.60 -2.20 -1.44 -2.47 -1.39
(4.360) (2.877) (4.376) (2.945) (4.299) (3.027)
g70 2.01 5.14*** 1.36 5.52*** 1.34 5.56***
(1.842) (1.394) (2.165) (1.521) (2.209) (1.707)
g90 4.47 -3.22 3.48 -3.05 3.36 -3.02
(3.279) (2.218) (3.409) (2.168) (3.445) (2.257)
dependent×g70 -3.94 -1.70 -3.45 -1.83 -3.31 -1.91
(2.362) (4.539) (2.533) (4.410) (2.546) (4.525)
dependent×g90 -0.72 2.49 0.33 2.48 1.03 2.39
(3.830) (2.542) (4.130) (2.426) (4.111) (2.658)
block -0.34 2.37*** -0.78 2.21** -0.62 2.12**
(1.113) (0.735) (1.066) (0.741) (1.074) (0.768)
late 1.42 1.88 1.36 1.91 1.45 1.89
(0.908) (1.197) (0.901) (1.188) (0.861) (1.203)
L1s 1.74 -0.71 1.68 -0.85 0.89 -0.74
(1.782) (1.672) (1.658) (1.758) (1.564) (1.728)
L2s 3.66 -1.60 3.67 -1.50
(2.067) (1.375) (2.318) (1.430)
L3s 2.99* -0.15
(1.558) (1.455)
Constant 0.01 7.54** -2.33 8.86* -4.45 8.84*
(1.486) (3.363) (2.501) (4.124) (3.008) (4.411)
Observations 764 707 764 707 747 684
R-squared 0.080 0.262 0.092 0.266 0.103 0.251
Table 13: CDA Regression summary with lag states. The baseline treatment is A2S2-g80 . The
price here is the actual price - 100. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01. The regression is clustered at the
session level. L1s,L2s,and L3s refer to the states in the previous 1,2,and 3 periods.
78

D Final asset holdings in the two assets CDA markets
D.1 A2S2 markets
Market A2S2
Endowed Asset A B
A0B0 35 20
A1B0 35 23
A0B1 17 26
A1B1 23 24
A2B0 16 9
A0B2 8 16
A2B1 12 8
A1B2 9 17
A3B0 16 1
A0B3 3 6
A2B2 3 11
A3B1 2 3
A1B3 2 9
A4B0 5 1
A0B4 2 3
A3B2 3 3
A2B3 0 4
A4B1 0 1
A1B4 0 4
A0B5 1 3
Total 192 192
Table 14: Traders’ final asset holding combinations conditional on initial asset holdings. The table
covers all the possible final asset holdings in the experiment. Each “AXBY” row shows the number
of players who hold X Asset A and Y Asset B.
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D.2 A2S2de markets
Market A2S2de
Endowed Asset A B
A0B0 32 27
A1B0 24 14
A0B1 16 26
A1B1 31 21
A2B0 28 8
A0B2 4 20
A2B1 17 4
A1B2 7 27
A3B0 10 2
A0B3 1 14
A2B2 6 9
A3B1 3 1
A1B3 0 9
A4B0 4 2
A0B4 0 3
A3B2 4 1
A2B3 2 3
A4B1 2 0
A1B4 1 1
Total 192 192
Table 15: Traders’ final asset holding combinations conditional on initial asset holdings. The table
covers all the possible final asset holdings in the experiment. Each “AXBY” row shows the number
of players who hold X Asset A and Y Asset B.
80

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Salience in Markets with Multiple Assets: An

This version: December 28th 2023

JEL Classification: C90, D53, G10, G40

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In addition to the aforementioned theoretical models, the observed mispricing within

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The investor’s decision is to maximize the expected utility at period 0 as

pj = E[wjs · xjs ] = E[xjs ] + cov[wjs , xjs ] (4)

in my CDA market treatments.

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Proposition 1 remains qualitatively unchanged and remains unaffected even if a fraction

Each experimental session comprises multiple independent trading periods, contingent

4.1 Assets Structure

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Asset A (salient upside) Asset B (salient downside)

Table 1: Asset information.

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4.2 BDM Market

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4.3 Call Market

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4.4 CDA Two Assets Markets

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4.5 CDA Single Asset Market

To investigate whether mispricing is influenced by absolute skewness preference or relative

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5.1 BDM Market

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Hypothesis 1(a) finds empirical support in the experimental data. Nevertheless, it is

yit = β0 + β1 g70 i + β2 g90 i + β3 blocki + ϵit (5)

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(c) mid over periods. (d) bid over periods.

(e) ask over periods. (f) prices by subjects.

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5.2 Call Market

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(c) market price over periods. (d) bid over periods.

(e) ask over periods. (f) prices by subjects.

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(a) asset prices by subjects. (b) average price vs total volume.

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(1) (2) (3) (4) (5) (6)

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