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Option Pricing by Students and Professional Traders: A Behavioural Investigation

  • KLAUS ABBINK

    ()

    (School of Economics, The University of Nottingham)

  • BETTINA ROCKENBACH

    ()

    (Lehrstuhl fuer Mikrooekonomie, Universitaet Erfurt)

We compare the behaviour of students and professional traders from an influential German bank in an experiment involving financial options. The arbitrage free option price is independent of the probability distribution of the underlying asset. The experimental data uncover a probability dependent option valuation of the students, however, they learn to exploit more arbitrage as they gain experience. The professional traders exhibit a less probability sensitive valuation, but their overall performance is lower than the students’. We offer the explanation that the professional traders choose a more intuitive and less analytic pattern of behaviour than the students, despite their superior knowledge in financial market theory and practice. At real financial markets, traders are typically not confronted with given and known exact probability distributions, but they must rather rely on their intuitive calibration of the prospects.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2005-12.

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Date of creation: Jul 2005
Date of revision:
Publication status: Forthcoming in Managerial and Decision Economics
Handle: RePEc:not:notcdx:2005-12
Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
Phone: (44) 0115 951 5620
Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/economics/cedex/
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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. 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.
  3. Banks Jeffrey & Camerer Colin & Porter David, 1994. "An Experimental Analysis of Nash Refinements in Signaling Games," Games and Economic Behavior, Elsevier, vol. 6(1), pages 1-31, January.
  4. Dejong, Douglas V. & Forsythe, Robert & Uecker, Wilfred C., 1988. "A note on the use of businessmen as subjects in sealed offer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 9(1), pages 87-100, January.
  5. 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.
  6. 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.
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