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Option pricing by students and professional traders: a behavioural investigation

  • 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)

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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File URL: http://hdl.handle.net/10.1002/mde.1284
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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
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Abbink, Klaus & Abdolkarim Sadrieh, 1995. "RatImage - research Assistance Toolbox for Computer-Aided Human Behavior Experiments," Discussion Paper Serie B 325, University of Bonn, Germany.
  2. C. Bram Cadsby & Elizabeth Maynes, 1998. "Laboratory experiments in corporate and investment finance: a survey," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 277-298.
  3. Douglas DeJong & Robert Forsythe & Wilfred Uecker, 1988. "A note on the use of businessmen as subjects in sealed offer markets," Artefactual Field Experiments 00039, The Field Experiments Website.
  4. Dyer, D. & Kagel, J.H. & Levin, D., 1988. "A Comparison Of Naive And Experienced Bidders In Common Value Offer Auctions A Laboratory Analysis," Papers 11, Houston - Department of Economics.
  5. Banks, Jeffrey & Camerer, Colin & Porter, David., 1990. "An Experimental Analysis of Nash Refinements in Signaling Games," Working Papers 740, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-81, September.
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