Exploring the Nature of “Trader Intuition”


  • Bruguier, Quartz, and Bossaerts are at the California Institute of Technology, and Bossaerts is also at the Ecole Polytechnique Fédérale Lausanne. This work was supported by the NSF through grant SES-0527491 to Caltech and by the Swiss Finance Institute. Comments from Ralph Adolphs, Colin Camerer, Fulvia Castelli, John Dickhaut, John Ledyard, Charles Plott, Tania Singer, the Editor, an Associate Editor, four referees, and seminar participants at Norwegian School of Management, Haute Ecole des Hautes Etudes Commerciales (Paris), Northwestern University (Kellogg), National University of Singapore, Okinawa Institute of Science and Technology, Rice University, University of Zurich, University of Louvain, University of Texas (Austin and Dallas), the 2007 Caltech-Tamagawa Neuroscience Symposium, the 2007 Japan Neuroscience Society meetings, the 2008 meetings of the Swiss Finance Institute, the 2008 Western Finance Association meetings (especially the discussant, Heather Tookes), and the 2008 International Meetings of the Economic Science Association are gratefully acknowledged.


Experimental evidence has consistently confirmed the ability of uninformed traders, even novices, to infer information from the trading process. After contrasting brain activation in subjects watching markets with and without insiders, we hypothesize that Theory of Mind (ToM) helps explain this pattern, where ToM refers to the human capacity to discern malicious or benevolent intent. We find that skill in predicting price changes in markets with insiders correlates with scores on two ToM tests. We document GARCH-like persistence in transaction price changes that may help investors read markets when there are insiders.