CiteWeb id: 20010000119

CiteWeb score: 4524

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 15 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 actively purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, during the Þve minutes that follow these trades, prices revert strongly to their earlier levels. Consistent with these Þndings, short-term afternoon price volatility is positively related to the prevalence of morning losses among locals, but overall afternoon price volatility is not.