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Do professional traders exhibit myopic loss aversion? An experimental analysis

  • John List
  • Michael Haigh

Two behavioral concepts, loss aversion and mental accounting, have recently been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence suggests that undergraduate students' behavior is consistent with this "myopic loss aversion" conjecture. Our suspicion is that, much like certain anomalies in the realm of riskless decisions, these behavioral tendencies will be severely attenuated when real market players are put to the task. Making use of a unique subject pool-professional futures and options pit traders recruited from the Chicago Board of Trade-we do find behavioral differences between professionals and students. Yet, rather than discovering that the anomaly disappears, the data suggest that professional traders exhibit myopic loss aversion to a greater extent than undergraduate students.

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Paper provided by The Field Experiments Website in its series Artefactual Field Experiments with number 00052.

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Date of creation: 2005
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Handle: RePEc:feb:artefa:00052
Contact details of provider: Web page: http://www.fieldexperiments.com

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  1. Gneezy, U. & Kapteyn, A. & Potters, J.J.M., 2002. "Evaluation Periods and Asset Prices in a Market Experiment," Discussion Paper 2002-8, Tilburg University, Center for Economic Research.
  2. Gneezy, Uri & Potters, Jan, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 631-45, May.
  3. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  4. repec:ner:tilbur:urn:nbn:nl:ui:12-73908 is not listed on IDEAS
  5. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
  6. 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.
  7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  8. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
  9. Thaler, Richard H, et al, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 647-61, May.
  10. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, vol. 92(5), pages 1636-1643, December.
  11. Gollier, C. & Lindsey, J. & Zeckhauser, R., 1996. "Investment Flexibility and the Acceptance of Risk," Papers 96.421, Toulouse - GREMAQ.
  12. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 41-71, February.
  13. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  14. Theodore W. Schultz, 1962. "Reflections on Investment in Man," Journal of Political Economy, University of Chicago Press, vol. 70, pages 1.
  15. Gneezy, U. & Kapteyn, A. & Potters, J.J.M., 2002. "Evaluation Periods and Asset Prices in a Market Experiment," Discussion Paper 2002-8, .
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