Robert J. Bloomfield

Can transparent markets survive

This paper investigates whether transparent markets can survive when faced with direct competition from less transparent markets. We first construct a game-theoretic model in which in equilibrium the low-transparency dealers capture early order flow, and use the resulting informational advantage to quote narrower spreads and earn more profits than their more transparent competitors. We then conduct a laboratory experiment that tests and supports all of these predictions. A second experiment shows that most dealers choose to be of lower transparency when they are allowed to do so. However, the informational advantage of low-transparency decreases as there are more such dealers, while the high-transparency dealers get increasing benefit from informed traders who attempt to broadcast deceptive trades. As a result, a small number of transparent dealers persist in our markets.

Does order preferencing matter

Abstract This study examines how order preferencing affects the competitiveness and efficiency of laboratory financial markets. We operationalize preferencing by allowing some dealers to execute a portion of the order flow by matching the most favorable quotes available. Increasing the proportion of order flow that is preferenced can increase bid–ask spreads, reduce the informational efficiency of prices, and benefit dealers at the expense of liquidity traders. Preferencing has none of these effects, however, when two or more dealers are not receiving preferencing orders. Preferencing may significantly degrade market performance if preferencing arrangements affect all, or virtually all, dealers.

Norms, Conformity, and Controls

Research in behavioral economics suggests that in addition to their traditional incentive effects, formal control systems can influence psychological motivations. We extend this literature by demonstrating experimentally that formal controls directly influence people’s sense of what behaviors are appropriate in the setting (personal norms), and indirectly alter people’s tendency to conform to the behavior of those around them (descriptive norms). These effects persist even after the controls are changed, so that the effects of current controls can be strongly influenced by past control strength. Our results support those who are incorporating psychological factors into principal-agent models (such as Fischer and Huddart [2008]), and suggest that those models should be further modified to incorporate correlations between personal norms and conformity to descriptive norms.

Do Investors Overrely on Old Elements of the Earnings Time Series

This paper reports an experiment demonstrating that MBA students overrely on old earnings performance when predicting future earnings performance in a laboratory setting. In the experiment, MBA students relied too heavily on old annual ROE information to predict future annual ROE. The experiment shows how a common cognitive error (overreliance on unreliable information) interacts with the structure of the earnings time series to create particular patterns of prediction errors. The results also suggest directions for research on two well†known anomalies, long†run overreactions (De Bondt and Thaler 1985, 1987) and post†earnings†announcement drift (Bernard and Thomas 1990).

Gathering Data for Archival, Field, Survey and Experimental Accounting Research

In the published proceedings of the first Journal of Accounting Research Conference, Vatter [1966] lamented that “Gathering direct and original facts is a tedious and difficult task, and it is not surprising that such work is avoided.” For the fiftieth JAR Conference, we introduce a framework to help researchers understand the complementary value of seven empirical methods that gather data in different ways: prestructured archives, unstructured (“hand-collected”) archives, field studies, field experiments, surveys, laboratory studies, and laboratory experiments. The framework spells out five goals of an empirical literature and defines the seven methods according to researchers’ choices with respect to five data gathering tasks. We use the framework and examples of successful research studies to clarify how data gathering choices affect a study’s ability to achieve its goals, and conclude by showing how the complementary nature of different methods allows researchers to build a literature more effectively than they could with less diverse approaches to gathering data.

Margin Trading, Overpricing, and Synchronization Risk

We provide experimental evidence that relaxing margin restrictions to allow more short selling can exacerbate overpricing, even though it reduces equilibrium price levels. This is because smart-money traders initially profit more by front-running optimistic investor sentiment than by disciplining prices. When short selling is not possible, competitive pressures among arbitrageurs rapidly drive prices to the equilibrium. However, the risk of margin calls slows the convergence process, because arbitrageurs who sell short too early face substantial losses if they are unable to synchronize their trades with other arbitrageurs (as in Abreu and Brunnermeier. 2002. Journal of Financial Economics 66(2--3):341--60; 2003. Econometrica 71(1):173--204). The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Worlds for Study: Invitation - Virtual Worlds for Studying Real-World Business (and Law, and Politics, and Sociology, and....)

Virtual worlds promise to be an excellent venue for research and education in business and related disciplines. This document provides an introduction to virtual worlds, discusses why virtual worlds are so well-suited to the study of real-world business, and describes how a platform could weave together various types of virtual worlds and virtual spaces to achieve a variety of research and educational goals. I close by inviting instructors, students, researchers, textbook authors, publishers, game developers and others to join in a collaboration to make this vision a (virtual) reality.

Which Moral Foundations Predict Willingness to Make Lifestyle Changes to Avert Climate Change in the USA

Jonathan Haidt’s Moral Foundations Theory identifies five moral axes that can influence human motivation to take action on vital problems like climate change. The theory focuses on five moral foundations, including compassion, fairness, purity, authority, and ingroup loyalty; these have been found to differ between liberals and conservatives as well as Democrats and Republicans. Here we show, based on the Cornell National Social Survey (USA), that valuations of compassion and fairness were strong, positive predictors of willingness to act on climate change, whereas purity had a non-significant tendency in the positive direction (p = 0.07). Ingroup loyalty and authority were not supported as important predictor variables using model selection (ΔAICc__). Compassion and fairness were more highly valued by liberals, whereas purity, authority, and in-group loyalty were more highly valued by conservatives. As in previous studies, participants who were younger, more liberal, and reported greater belief in climate change, also showed increased willingness to act on climate change. Our research supports the potential importance of moral foundations as drivers of intentions with respect to climate change action, and suggests that compassion, fairness, and to a lesser extent, purity, are potential moral pathways for personal action on climate change in the USA.

Pragmatics, Implicature and the Efficiency of Elevated Disclosure

This paper uses a Pragmatic theory of language (drawn from philosophy and linguistics) to diagnose the causes of excessive and inefficient financial disclosure and propose a regulatory solution. The diagnosis is that existing regulations are effective at encouraging firms to adhere to some, but not all, of the Maxims of Conversation identified by Pragmatics. Regulations encourage firms to disclose any information that might be relevant, but are ineffective in discouraging excessive disclosure of information that is of little relevance given what investors already know. This one-sidedness makes financial disclosures inefficient by limiting the ability for investors to infer that items the firm chooses not to disclose are not particularly important (an inference Pragmatic theorists call “implicature”). The solution is to encourage or require firms to supplement comprehensive disclosures with an “elevated” disclosure that is brief enough to force firms to be selective in choosing what information to include. Regulations can enhance implicature through rules that prohibit firms from elevating disclosures that are less newsworthy than disclosures that are not elevated, thereby enhancing the information conveyed to investors through implicature.

Comments on the Proposed SEC's 2010-2015 Draft Strategic Plan

SYNOPSIS: The SEC has proposed a strategic plan that sets out its mission, vision, and values, four strategic goals, a set of desired outcomes associated with each strategic goal, and a list of performance measures for assessing the SEC’s effectiveness in attaining its goals. We affirm the need for vigorous enforcement of securities law and offer some research-based insights and performance indicators. We also acknowledge the importance of disclosure, but propose that the SEC needs to develop a disclosure framework and develop better operational indicators of quality of disclosure. It is important to appreciate the benefits of disclosure as well as its limits and potential dysfunctional consequences. We also discuss the need for an independent accounting standard setter and recommend that the SEC take a greater role in enhancing the independence of the FASB.