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Option pricing by students and professional traders: a behavioural investigation

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  • Klaus Abbink

    (School of Economics, The University of Nottingham, University Park, Nottingham NG7 2RD, UK)

  • Bettina Rockenbach

    (Lehrstuhl für Mikroökonomie, Universität Erfurt, Nordhäuser Str. 63, 99089 Erfurt, Germany)

Abstract

We compare behaviour of students and professional traders from an influential German bank in an option pricing experiment. The arbitrage free price is independent of the probability distribution of the underlying asset. Students show a probability-dependent option valuation, but learn to exploit more arbitrage with experience. The professional traders exhibit a less probability sensitive valuation, but their performance is lower than the students'. We explain this with a more intuitive and less analytic approach used by the professional traders, despite their superior knowledge of financial markets, due to the lack of known probability distributions in real markets. Copyright © 2006 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 27 (2006)
Issue (Month): 6 ()
Pages: 497-510

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Handle: RePEc:wly:mgtdec:v:27:y:2006:i:6:p:497-510

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Dyer, D. & Kagel, J.H. & Levin, D., 1988. "A Comparison Of Naive And Experienced Bidders In Common Value Offer Auctions A Laboratory Analysis," Papers, Houston - Department of Economics 11, Houston - Department of Economics.
  2. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, American Finance Association, vol. 39(4), pages 955-81, September.
  3. Dejong, Douglas V. & Forsythe, Robert & Uecker, Wilfred C., 1988. "A note on the use of businessmen as subjects in sealed offer markets," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 9(1), pages 87-100, January.
  4. Banks Jeffrey & Camerer Colin & Porter David, 1994. "An Experimental Analysis of Nash Refinements in Signaling Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(1), pages 1-31, January.
  5. Abbink, Klaus & Abdolkarim Sadrieh, 1995. "RatImage - research Assistance Toolbox for Computer-Aided Human Behavior Experiments," Discussion Paper Serie B, University of Bonn, Germany 325, University of Bonn, Germany.
  6. C. Bram Cadsby & Elizabeth Maynes, 1998. "Laboratory experiments in corporate and investment finance: a survey," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(4-5), pages 277-298.
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Cited by:
  1. Christian Wolff & Thorsten Lehnert & Cokki Versluis, 2009. "A Cumulative Prospect Theory Approach to Option Pricing," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 09-03, Luxembourg School of Finance, University of Luxembourg.
  2. Sebastian J. Goerg & Gari Walkowitz, 2010. "On the Prevalence of Framing Effects Across Subject-Pools in a Two- Person Cooperation Game," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2010_28, Max Planck Institute for Research on Collective Goods.
  3. Burmeister-Lamp, Katrin & Lévesque, Moren & Schade, Christian, 2012. "Are entrepreneurs influenced by risk attitude, regulatory focus or both? An experiment on entrepreneurs' time allocation," Journal of Business Venturing, Elsevier, vol. 27(4), pages 456-476.
  4. Fochmann, Martin & Kiesewetter, Dirk & Sadrieh, Abdolkarim, 2012. "Investment behavior and the biased perception of limited loss deduction in income taxation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 81(1), pages 230-242.
  5. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2013. "Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks," Discussion Papers of DIW Berlin 1337, DIW Berlin, German Institute for Economic Research.
  6. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2012. "Hidden Skewness," Discussion Papers of DIW Berlin 1238, DIW Berlin, German Institute for Economic Research.
  7. Blaufus, Kay & Möhlmann, Axel, 2012. "Security returns and tax aversion bias: Behavioral responses to tax labels," arqus Discussion Papers in Quantitative Tax Research 133, arqus - Arbeitskreis Quantitative Steuerlehre.
  8. Barner, Martin & Feri, Francesco & Plott, Charles, 2004. "On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 1204, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Hansen, Kristiana & Kaplan, Jonathan D. & Kroll, Stephan, 2008. "Valuing Options in Water Markets: A Laboratory Investigation," Working Papers, Colorado State University, Department of Agricultural and Resource Economics 108722, Colorado State University, Department of Agricultural and Resource Economics.
  10. Gurevich, Gregory & Kliger, Doron & Levy, Ori, 2009. "Decision-making under uncertainty - A field study of cumulative prospect theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(7), pages 1221-1229, July.
  11. Da Costa, Newton & Goulart, Marco & Cupertino, Cesar & Macedo, Jurandir & Da Silva, Sergio, 2013. "The disposition effect and investor experience," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(5), pages 1669-1675.
  12. Martina Nardon & Paolo Pianca, 2012. "Prospect theory: An application to European option pricing," Working Papers 2012:34, Department of Economics, University of Venice "Ca' Foscari".

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