Journal of Finance Vol. 60 No. 1 2005

Do Behavioral Biases Affect Prices?

Joshua D. Coval^1,2; Tyler Shumway^3,4,5,6

¹ Harvard University · ² Dana-Farber/Harvard Cancer Center · ³ Twitter (United States) · ⁴ Cornell University · ⁵ University of Michigan–Ann Arbor · ⁶ Ross School

Abstract

This paper documents strong evidence for behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss‐averse, regularly assuming above‐average afternoon risk to recover from morning losses. This behavior has important short‐term consequences for afternoon prices, as losing traders actively purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, the market appears to distinguish these risk‐seeking trades from informed trading. Prices set by loss‐averse traders are reversed significantly more quickly than those set by unbiased traders.

DOI

10.1111/j.1540-6261.2005.00723.x

Volume

60

Issue

1

Pages

1-34

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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