nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2024‒10‒07
two papers chosen by
Marco Novarese, Università degli Studi del Piemonte Orientale
  1. Return Predictability, Expectations, and Investment: Experimental Evidence By Marianne Andries; Milo Bianchi; Karen Huynh; Sébastien Pouget
  2. Striking Out: Biases and Losses of Retail Option Traders By Aleksi Pitkäjärvi; Matteo Vacca
  1. By: Marianne Andries (USC - University of Southern California); Milo Bianchi (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Karen Huynh (AMUNDI Asset Management); Sébastien Pouget (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: In an investment experiment, we show variations in information affect belief and decision behaviors within the information-beliefs-decisions chain. Subjects observe the time series of a risky asset and a signal that, in random rounds, helps predict returns. When they perceive the signal as useless, subjects form extrapolative forecasts, and their investment decisions underreact to their beliefs. When they perceive the signal as predictive, the same subjects rationally use it in their forecasts, they no longer extrapolate, and they rely significantly more on their forecasts when making risk allocations. Analyzing investments without observing forecasts and information sets leads to erroneous interpretations.
    Keywords: Return Predictability, Expectations, Long-Term Investment, Extrapolation, Model Uncertainty.
    Date: 2024–08
    URL: https://d.repec.org/n?u=RePEc:hal:journl:hal-04680777
  2. By: Aleksi Pitkäjärvi (Vrije Universiteit Amsterdam); Matteo Vacca (Aalto University School of Business and Hanken School of Economics)
    Abstract: Analyzing over 15 years of account-level trading records from Finland, we show that option features—expiration, moneyness, and the strike price—influence the behavior of retail investors and exacerbate their behavioral biases. Retail investors selectively exploit the expiration feature of options to mitigate the psychological costs associated with selling losing positions, generating a strong disposition effect especially for out-of-the-money options. They also use the strike price of an option as an objective, instrument-specific reference point when making their selling decisions. Behavioral biases contribute to heterogeneity in option trading performance, with the worst performance concentrated among investors with the strongest biases.
    Keywords: options, retail investors, behavioral biases, disposition effect
    JEL: G41 G40 G50 G11
    Date: 2024–06–06
    URL: https://d.repec.org/n?u=RePEc:tin:wpaper:20240039
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