Abstract

We develop and test a framework of mental information representation in an asset market setting. The model predicts heterogeneous trading behaviour as a consequence of two distinct mental capabilities: analytical skills and mentalising, where the former involves quantitative, objective aspects of a decision problem, and the latter an accurate assessment of others’ behaviour and intentions.

Individual differences in capabilities induce specific, differential trading patterns and performances, despite the availability of identical information. The most successful traders are strong in both capabilities, while the general relation between success and mental capabilities is non-monotone. The experimental data strongly supports the theoretical conjectures.