Cognitive Limitation and Investment Performance: Evidence from Limit Order Clustering

Review of Financial Studies, Forthcoming

87 Pages Posted: 19 Jan 2012 Last revised: 17 Feb 2014

See all articles by Weiyu Kuo

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Jing Zhao

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: February 14, 2014

Abstract

We hypothesize that cognitive limitation may be manifested in a disproportionately large volume of limit orders submitted at round-number prices if investors use these numbers as cognitive shortcuts. Using detailed limit order data in the Taiwan Futures Exchange, we find that investors with lower cognitive abilities, defined as higher limit order submission ratios at round numbers, suffer greater losses in their round-numbered and non-round-numbered limit orders, market orders, and round-trip trades. The positive correlation between cognitive ability and investment performance is monotonic and robust across futures and options markets. In addition, past trading experience helps to mitigate the cognitive limitation.

Keywords: cognitive limitation, cognitive abilities, limit order clustering, investment performance, individual investors, investor learning

JEL Classification: G02, G15

Suggested Citation

Kuo, Weiyu and Lin, Tse-Chun and Zhao, Jing, Cognitive Limitation and Investment Performance: Evidence from Limit Order Clustering (February 14, 2014). Review of Financial Studies, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1988236 or http://dx.doi.org/10.2139/ssrn.1988236

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business ( email )

Taipei City
Taiwan

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Jing Zhao

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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