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Option pricing by students and professional traders: a behavioural investigation

Author

Listed:
  • 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.

Suggested Citation

  • Klaus Abbink & Bettina Rockenbach, 2006. "Option pricing by students and professional traders: a behavioural investigation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 497-510.
    • Handle: RePEc:wly:mgtdec:v:27:y:2006:i:6:p:497-510
    DOI: 10.1002/mde.1284
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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