Abstract
We utilize laboratory experiments to pinpoint three drivers of trader performance: fluid intelligence, cognitive reflection and theory of mind. Fluid intelligence provides traders with computational skills necessary to undertake statistical inference. Cognitive reflection helps traders avoid behavioral biases thereby allowing them to extract signals from market orders and update their prior beliefs accordingly. Theory of mind allows traders to assess the informational content of orders thus offering hints on the quality of those signals. We show cognitive reflection and theory of mind are complementary because traders benefit from understanding signals’ quality only if they are capable of processing them.
