Dynamic Decision Making in Agricultural Futures and Options Markets
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.
|Date of creation:||2008|
|Contact details of provider:|| Postal: 326 Mumford Hall, MC-710, 1301 West Gregory Drive, Urbana, Illinois, 61801|
Phone: (217) 333-1810
Fax: (217) 333-5538
Web page: http://www.farmdoc.uiuc.edu/nccc134/
More information through EDIRC
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.:
- Lucy Ackert & Narat Charupat & Bryan Church & Richard Deaves, 2006.
"An experimental examination of the house money effect in a multi-period setting,"
Springer;Economic Science Association, vol. 9(1), pages 5-16, April.
- Lucy F. Ackert & Narat Charupat & Bryan K. Church & James Tompkins & Richard Deaves, 2003. "An experimental examination of the house money effect in a multi-period setting," FRB Atlanta Working Paper 2003-13, Federal Reserve Bank of Atlanta.
- Massimo Massa & Andrei Simonov, 2005. "Behavioral Biases and Investment," Review of Finance, Springer, vol. 9(4), pages 483-507, December.
- Massimo Massa & Andrei Simonov, 2005. "Behavioral Biases and Investment," Review of Finance, European Finance Association, vol. 9(4), pages 483-507.
- 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.
- 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.
- 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.
- Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
- Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
- 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.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 43-66, Fall.
- Ernst Fehr & Jean-Robert Tyran, "undated". "Individual Irrationality and Aggregate Outcomes," IEW - Working Papers 252, Institute for Empirical Research in Economics - University of Zurich.
- Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Discussion Papers 05-09, University of Copenhagen. Department of Economics.
- Joshua D. Coval & Tyler Shumway, 2005. "Do Behavioral Biases Affect Prices?," Journal of Finance, American Finance Association, vol. 60(1), pages 1-34, 02.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ags:nccest:37605. 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: (AgEcon Search)
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.