IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Prior Consequences and Subsequent Risk Taking: New Field Evidence from the Taiwan Futures Exchange

Author Info

Listed author(s):
  • Yu-Jane Liu

    ()

    (Department of Finance, Guanghua School of Management, Peking University, Beijing 100871, People's Republic of China)

  • Chih-Ling Tsai

    ()

    (Graduate School of Management, University of California, Davis, Davis, California 95616)

  • Ming-Chun Wang

    ()

    (National Kaohsiung First University of Science and Technology, Kaohsiung 81164, Taiwan)

  • Ning Zhu

    ()

    (Graduate School of Management, University of California, Davis, Davis, California 95616; and Shanghai Advanced Institute of Finance (SAIF), Shanghai 200030, People's Republic of China)

Registered author(s):

Abstract

We use a data set from market participants in the Taiwan Stock Exchange Capitalization Weighted Stock Index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking. In particular, investors in this market take above-average risks in afternoon trading after morning gains. The phenomenon is prevalent in all three types of market makers' accounts and across different types of market participants. Our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters (i.e., expected return, trading period, and curvature of the value function), because prospect theory can predict both increased and decreased levels of subsequent risk taking. We provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://dx.doi.org/10.1287/mnsc.1090.1131
Download Restriction: no

Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 4 (April)
Pages: 606-620

as
in new window

Handle: RePEc:inm:ormnsc:v:56:y:2010:i:4:p:606-620
Contact details of provider: Postal:
7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

Phone: +1-443-757-3500
Fax: 443-757-3515
Web page: http://www.informs.org/
Email:


More information through EDIRC

Keywords: dynamic prospect theory; risk taking; market makers; options markets;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Nicholas Barberis & Wei Xiong, 2009. "What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation," Journal of Finance, American Finance Association, vol. 64(2), pages 751-784, 04.
  2. 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;Economic Science Association, vol. 9(1), pages 5-16, April.
  3. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
  4. 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.
  5. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
  6. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 601-627.
  7. Brad M. Barber & Terrance Odean & Ning Zhu, 2009. "Do Retail Trades Move Markets?," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 151-186, January.
  8. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
  9. Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, 02.
  10. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  11. Uri Gneezy & Arie Kapteyn & Jan Potters, 2003. "Evaluation Periods and Asset Prices in a Market Experiment," Journal of Finance, American Finance Association, vol. 58(2), pages 821-838, 04.
  12. Nicholas Barberis & Ming Huang & Richard H. Thaler, 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing," American Economic Review, American Economic Association, vol. 96(4), pages 1069-1090, September.
  13. 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.
  14. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  15. Barber, Brad M. & Odean, Terrance & Zhu, Ning, 2009. "Systematic noise," Journal of Financial Markets, Elsevier, vol. 12(4), pages 547-569, November.
  16. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
  17. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  18. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
  19. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. "Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:

  1. Pikulina, Elena & Renneboog, Luc & Ter Horst, Jenke & Tobler, Philippe N., 2014. "Bonus schemes and trading activity," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 369-389.
  2. Kremena Bachmann & Thorsten Hens, 2016. "Is there Swissness in investment decision behavior and investment competence?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(3), pages 233-275, August.
  3. Desmond Lam & Bernadete Ozorio, 2013. "The effect of prior outcomes on gender risk-taking differences," Journal of Risk Research, Taylor & Francis Journals, vol. 16(7), pages 791-802, August.
  4. Vidal-García, Javier & Vidal, Marta, 2014. "Seasonality and idiosyncratic risk in mutual fund performance," European Journal of Operational Research, Elsevier, vol. 233(3), pages 613-624.
  5. Chou, Robin K. & Wang, Yun-Yi, 2011. "A test of the different implications of the overconfidence and disposition hypotheses," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2037-2046, August.
  6. Huang, Yu Chuan & Chan, Shu Hui, 2014. "The house money and break-even effects for different types of traders: Evidence from Taiwan futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 1-13.
  7. Duxbury, Darren & Hudson, Robert & Keasey, Kevin & Yang, Zhishu & Yao, Songyao, 2015. "Do the disposition and house money effects coexist? A reconciliation of two behavioral biases using individual investor-level data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 55-68.
  8. Hsu, Yuan-Lin & Chow, Edward H., 2013. "The house money effect on investment risk taking: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1102-1115.
  9. Noman, Abdullah & Naka, Atsuyuki & Zirek, Duygu, 2017. "Examining return predictability of industry style portfolios with prior return relative to a benchmark," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 193-203.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:56:y:2010:i:4:p:606-620. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.