Insights into Trader Behavior: Risk Aversion and Probability Weighting

Fabio Mattos, Philip Garcia and Joost Pennings ()

No 37569, 2007 Conference, April 16-17, 2007, Chicago, Illinois from NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: The objective of this study is to investigate how professional traders in futures and options markets behave under risk and uncertainty. Our preliminary findings suggest that most traders exhibit concave utility functions for gains and convex utility functions for losses, while their weighting functions are inverse s-shaped. However, differences in magnitude of the risk aversion parameters and the degree of probability weighting can lead to distinct behavior even if the shapes of utility and weighting functions are the same. Further, the typical pattern of prospect theory is more prevalent under risk but not as much under uncertainty. More combinations of shapes for utility and weighting functions are found under uncertainty, suggesting that different types of behavior emerge when people need to make their own assessments about the likelihood of events. Finally, our results are consistent with evidence of loss aversion and disposition effect found in studies of trading behavior in futures markets.

Pages: 23
Date: 2007-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nccsci:37569

DOI: 10.22004/ag.econ.37569

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