Do Behavioral Biases Affect Prices?

35 Pages Posted: 15 May 2001

See all articles by Joshua D. Coval

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Date Written: May 4, 2001

Abstract

This paper documents strong evidence of behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss-averse. Traders who experience morning losses are about 16 percent more likely to assume above-average afternoon risk than traders with morning gains. This behavior has important short-term consequences for afternoon prices, as losing traders are prepared to purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, during the ten minutes that follow these trades, prices revert strongly to their earlier levels. Consistent with these findings, short-term afternoon price volatility is positively related to the prevalence of morning losses among locals, but overall afternoon price volatility is not.

Keywords: Loss Aversion

JEL Classification: G1

Suggested Citation

Coval, Joshua D. and Shumway, Tyler, Do Behavioral Biases Affect Prices? (May 4, 2001). EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=269113 or http://dx.doi.org/10.2139/ssrn.269113

Joshua D. Coval (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

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