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Human vs. Machine: Disposition Effect among Algorithmic and Human Day Traders

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  • Karolis Liaudinskas

Abstract

This paper studies whether and why algorithmic traders exhibit one of the most broadlydocumented behavioral puzzles – the disposition effect. We use trade data from the NASDAQ Copenhagen Stock Exchange merged with the weather data. We find that on average, the disposition effect for human traders is substantial and increases significantly on colder days, while for similarly-trading algorithms, it is insignificant and insensitive to the weather. This provides causal evidence of the link between human psychology and the disposition effect and suggests that algorithms can reduce psychology-related human errors. Considering the ongoing AI adoption, this may have broad implications.

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  • Karolis Liaudinskas, 2022. "Human vs. Machine: Disposition Effect among Algorithmic and Human Day Traders," Working Paper 2022/6, Norges Bank.
    • Handle: RePEc:bno:worpap:2022_6
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    File URL: https://hdl.handle.net/11250/2997502
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    More about this item

    Keywords

    Disposition effect; Algorithmic trading; High-frequency trading; Decision making; Financial markets; Rationality;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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