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Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis

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  • MICHAEL S. HAIGH
  • JOHN A. LIST

Abstract

Two behavioral concepts, loss aversion and mental accounting, have been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence supports the theory, as students' behavior has been found to be consistent with myopic loss aversion (MLA). Yet, much like certain anomalies in the realm of riskless decision-making, these behavioral tendencies may be attenuated among professionals. Using traders recruited from the CBOT, we do indeed find behavioral differences between professionals and students, but rather than discovering that the anomaly is muted, we find that traders exhibit behavior consistent with MLA to a "greater" extent than students. Copyright 2005 by The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 60 (2005)
Issue (Month): 1 (02)
Pages: 523-534

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Handle: RePEc:bla:jfinan:v:60:y:2005:i:1:p:523-534

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  1. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1.
  2. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
  3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  4. John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc.
  5. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  6. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 647-61, May.
  7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  8. Gneezy, U. & Kapteyn, A. & Potters, J.J.M., 2002. "Evaluation Periods and Asset Prices in a Market Experiment," Discussion Paper 2002-8, Tilburg University, Center for Economic Research.
  9. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  10. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, vol. 92(5), pages 1636-1643, December.
  11. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  12. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments 00297, The Field Experiments Website.
  13. Gollier, Christian & Lindsey, John & Zeckhauser, Richard J., 1997. "Investment Flexibility and the Acceptance of Risk," Journal of Economic Theory, Elsevier, vol. 76(2), pages 219-241, October.
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