Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace

35 Pages Posted: 7 Mar 2014 Last revised: 6 Jan 2015

Date Written: December 2014

Abstract

We use novel data on individual activity in a sports betting market to study the effect of past performance sequences on individual behavior in a real market. The revelation of fundamental values in this market enables us to disentangle whether behavior is caused by sentiment or by superior information about market mispricings, hence to cleanly test in a real setting two sentiment-based theories of momentum and reversals — the regime-shifting model of Barberis, Shleifer, and Vishny (1998) and the gambler's/hot-hand fallacy model of Rabin (2002). Furthermore, our long panel allows us to calculate the proportions of individuals who exhibit each type of behavior. We find that i) three quarters of individuals exhibit trend-chasing behavior; ii) seven times as many individuals exhibit behavior consistent with Barberis, Shleifer, and Vishny (1998) as exhibit behavior consistent with Rabin (2002); and iii) no individuals earn superior returns from momentum trading.

Keywords: Momentum, Individual Decision-making, Heterogeneity, Behavioral Biases, Information

JEL Classification: D12, D81, G02, G11, G14

Suggested Citation

Andrikogiannopoulou, Angie and Papakonstantinou, Filippos, Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace (December 2014). Swiss Finance Institute Research Paper No. 14-19, Available at SSRN: https://ssrn.com/abstract=2405022 or http://dx.doi.org/10.2139/ssrn.2405022

Angie Andrikogiannopoulou (Contact Author)

King’s College London

Strand
London, England WC2R 2LS
United Kingdom

Filippos Papakonstantinou

King’s College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

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