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Dynamic Decision Making in Agricultural Futures and Options Markets

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  • Mattos, Fabio
  • Garcia, Philip
  • Pennings, Joost M.E.

Abstract

This paper investigates the dynamics of sequential decision-making in agricultural futures and options markets. Analysis of trading records of 12 traders identified considerable heterogeneity in individual dynamic trading behavior. Using risk measures derived from the deltas and vegas of trader’s portfolios, we find nearly half the traders behavior is consistent with a house-money effect and the other half with loss aversion. These findings correspond closely to expected behavior inferred from elicited utility and probability weighting functions. The results call into question more aggregate findings that discount probability weighting to develop risk measures which support the notion of more uniform, less heterogeneous, behavior. Understanding behavior in a prospect theory context appears to call for investigation of both the probability weighting and utility functions. Our findings also suggest that strategies for loss-averse traders who consolidate gains and avoid using gains in risk-seeking market activities are effective.

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Bibliographic Info

Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37605.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37605

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Keywords: loss aversion; house-money effect; futures; options; Agricultural Finance;

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References

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  1. Lucy Ackert & Narat Charupat & Bryan Church & Richard Deaves, 2006. "An experimental examination of the house money effect in a multi-period setting," Experimental Economics, Springer, vol. 9(1), pages 5-16, April.
  2. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2007. "Insights into Trader Behavior: Risk Aversion and Probability Weighting," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37569, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  3. 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.
  4. Ernst Fehr & Jean-Robert Tyran, . "Individual Irrationality and Aggregate Outcomes," IEW - Working Papers 252, Institute for Empirical Research in Economics - University of Zurich.
  5. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
  6. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  7. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
  8. Langer, Thomas & Weber, Martin, 2005. "Myopic prospect theory vs. myopic loss aversion: how general is the phenomenon?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(1), pages 25-38, January.
  9. Keasey, Kevin & Moon, Philip, 1996. "Gambling with the house money in capital expenditure decisions: An experimental analysis," Economics Letters, Elsevier, vol. 50(1), pages 105-110, January.
  10. Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, 02.
  11. Massimo Massa & Andrei Simonov, 2005. "Behavioral Biases and Investment," Review of Finance, Springer, vol. 9(4), pages 483-507, December.
  12. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
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