Keywords
loss aversion
Abstract
This paper documents strong evidence of behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss-averse. Traders who experience morning losses are about 16 percent more likely to assume above-average afternoon risk than traders with morning gains. This behavior has important short-term consequences for afternoon prices, as losing traders are prepared to purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, during the ten minutes that follow these trades, prices revert strongly to their earlier levels. Consistent with these findings, short-term afternoon price volatility is positively related to the prevalence of morning losses among locals, but overall afternoon price volatility is not.
Original Publication Citation
Do Behavioral Biases Affect Prices? 2005, with Joshua Coval, Journal of Finance
BYU ScholarsArchive Citation
Coval, Joshua D. and Shumway, Tyler, "Do Behavioral Biases Affect Prices?" (2001). Faculty Publications. 9284.
https://scholarsarchive.byu.edu/facpub/9284
Document Type
Peer-Reviewed Article
Publication Date
2001
Publisher
Journal of Finance
Language
English
College
Marriott School of Business
Department
Finance
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