Do Behavioral Biases Affect Prices?



    1. 1Harvard Business School
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    1. 2University of Michigan Business School
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    • Joshua D. Coval is at the Harvard Business School and Tyler Shumway is at University of Michigan Business School, respectively. This research is supported by the NTT fellowship of the Mitsui Life Center. We are grateful to Sugato Battacharyya, George Benston, Jonathan Berk, Hank Bessembinder, Jonathan Karpoff, Roni Michaely, Lubos Pastor, Matt Spiegel, Mark Taranto, Dick Thaler, Tuomo Vuolteenaho, Ivo Welch, George Wu, seminar participants at Berkeley, Chicago, Cincinnati, Cornell, Duke, Emory, HBS, Indiana, Michigan, North Carolina, Stanford, Wharton, Yale, the 2001 Meetings of the Western Finance Association in Tucson, the editor Rick Green, and an anonymous referee for helpful comments and suggestions. We also thank Steven J. Cho of the CFTC for helping us obtain the data used for this study.


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.