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Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis

Authors

  • MICHAEL S. HAIGH,

    1. 1Office of the Chief Economist at the U.S. Commodity Futures Trading Commission and AREC, University of Maryland
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  • JOHN A. LIST

    1. 2AREC and the Department of Economics, University of Maryland, and the NBER
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    • Haigh is from the Office of the Chief Economist at the U.S. Commodity Futures Trading Commission and AREC, University of Maryland. List is from AREC and the Department of Economics, University of Maryland, and the NBER. Please direct correspondence to List at JList@arec.umd.edu. We wish to thank the journal editor, Richard Green, for his patience, perseverance, and comments on earlier versions of the manuscript. An anonymous reviewer and Daniel Millimet provided very helpful comments. Liesl Koch helped prepare the manuscript and Jonathan Alevy provided able research assistance. Thanks also to John Di Clemente, former Managing Director of Research at the Chicago Board of Trade for authorizing the study. CBOT officials Dorothy Ackerman Anderson, Keith Schap, and Frederick Sturm also provided incredible support on site. Thanks to the University of Maryland for funding this research. The authors are grateful to Jana Hranaiova, seminar participants at the Washington Area Finance Association, and the Eastern Finance Association for their helpful comments. The views expressed in this paper are those of the authors and do not, in any way, reflect the views or opinions of the U.S. Commodity Futures Trading Commission.


Please direct correspondence to List at JList@arec.umd.edu.

ABSTRACT

Two behavioral concepts, loss aversion and mental accounting, have been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence supports the theory, as students' behavior has been found to be consistent with myopic loss aversion (MLA). Yet, much like certain anomalies in the realm of riskless decision-making, these behavioral tendencies may be attenuated among professionals. Using traders recruited from the CBOT, we do indeed find behavioral differences between professionals and students, but rather than discovering that the anomaly is muted, we find that traders exhibit behavior consistent with MLA to a greater extent than students.

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